Share Price Reactions to CEO Resignations and Large Shareholder Monitoring in Listed French Companies
CentER Working Paper No. 2000-70
34 Pages Posted: 6 Dec 2000
Date Written: August 2000
This study has analysed the share price reactions to changes in top management. A distinction was made among different types of CEO turnover: forced resignation, voluntary departures and age-related retirements. The announcement of a forced CEO resignation is hailed favourably by the market with a small but significantly positive abnormal return of 0.5%. The market may have anticipated the forced turnover since the abnormal return over a one-month period prior to the turnover amounts to 6%. Whereas voluntary resignations do not cause a price reactions, age-related turnover triggers a small negative price reaction. Subsequently, a more detailed classification of the change of top management was made based on the background of the successor (an internal versus external candidate), on the size of the corporation and the degree of corporate diversification. Expectedly, the nomination of an external manager following the performance-related forced resignation of a CEO causes a strong increase in abnormal returns of more than 2%. The cumulative abnormal return of an internal CEO promotion in a poorly performing firms drops by almost 1% on the day of the announcement. Presumably, this is because the internal manager is held (partially) responsible for past poor performance. In companies with good past performance and with internal succession, there is a price decline, but this is not statistically significant. The paper also analysed which corporate governance mechanisms are responsible for forced CEO turnover. A logit regression which accounted for time and industry specific fixed effects did not reveal a relation between performance and turnover. Furthermore, institutional investors, banks and the government do not seem to provoke CEO departures even if they own large blocks of equity. We did not find evidence that the government exerts control in the companies in which it holds majority shareholdings. In contrast, when industrial companies are major owners, there is evidence that forced turnover is facilitated. It also seems that it is easier to remove management in smaller companies than in larger ones. On the part of holding companies, there is only some evidence that they take a monitoring role in the case of other listed holding companies. No correlation was discovered between the degree of leverage and forced CEOs departures, although CEO turnover is facilitated if creditors have their own representatives on the board. Likewise, a high proportion of shareholder representatives on the board leads to a higher probability of forced CEO resignations. However, this probability decreases when the founding family is represented by one or more (executive) directors.
Keywords: Corporate governance, managerial disciplining, ownership structure, CEO succession, event study
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