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The Impact of CEO Turnover on Firm Volatility

40 Pages Posted: 10 Jun 2000  

Matthew J. Clayton

University of Virginia - McIntire School of Commerce

Jay C. Hartzell

University of Texas at Austin - Department of Finance

Joshua V. Rosenberg

Federal Reserve Bank of New York

Date Written: September 2003

Abstract

A change in executive leadership is a significant event in the life of a firm. This study investigates an important consequence of a CEO turnover: a change in equity volatility. We develop three hypotheses about how changes in CEO might affect stock-price volatility, and test these hypotheses using a sample of 872 CEO turnovers over the 1979 to 1995 period. We find that volatility increases following a CEO turnover, even for the most frequent type, when a CEO leaves voluntarily and is replaced by someone from inside the firm. Forced turnovers increase volatility more than voluntary turnovers, which we argue is consistent with forced departures implying a higher probability of large strategy changes. For voluntary departures, outside successions increase volatility more than inside successions, which we attribute to increased uncertainty over the successor CEO's skill in managing the firm's operations. We also document a greater stock-price response to earnings announcements following CEO turnover, consistent with more informative signals of value driving the increased volatility. Our findings are robust to controls for firm-specific characteristics such as changes in firm operations, firm size, and both volatility change and performance prior to the turnover.

Keywords: Turnover, Volatility, CEO

JEL Classification: G30, G12, G14, G34

Suggested Citation

Clayton, Matthew J. and Hartzell, Jay C. and Rosenberg, Joshua V., The Impact of CEO Turnover on Firm Volatility (September 2003). Available at SSRN: https://ssrn.com/abstract=222788 or http://dx.doi.org/10.2139/ssrn.222788

Matthew J. Clayton (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
434-243-4043 (Phone)
434-924-7074 (Fax)

Jay C. Hartzell

University of Texas at Austin - Department of Finance ( email )

1 University Station B6600
Austin, TX 78712
United States
512-471-6779 (Phone)
512-471-5073 (Fax)

HOME PAGE: http://www.mccombs.utexas.edu/faculty/jay.hartzell/

Joshua V. Rosenberg

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6317 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.ny.frb.org/research/economists/rosenberg/index.html

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