Bad News for Announcers, Good News for Rivals – Are Rivals Fully Seizing Transition-Period Opportunities Following Announcers’ Top Management Turnovers?

Abstract

Research summary. This study analyzes whether and how the disruption of top management turnovers can affect not only turnover firms but also their intra-industry rivals. It thus adds to the literature on both leader life cycles and competitive dynamics. Using a U.S. sample of 857 CEO turnovers, we find a period of relative stagnation for announcing companies following top management turnovers. We also find that intra-industry rivals can use this period to their advantage. Semi-structured interviews with seasoned CEOs, CFOs, and a board member from large publicly listed firms, as well as an extensive news search, support this notion. Intra-industry rivals gain a competitive advantage that can result in positive abnormal stock returns and accounting performance. The intra-industry outperformance is greater for forced turnovers.

Managerial summary. The departure of a company’s CEO, forced or not, is usually a disruptive event for a company, as the successor must adapt to the new environment before undertaking any major strategic changes. Rivals can seize an opportunity during the transition period of the announcing company because they remain fully operational. They can thus actively exploit the relative inability of turnover companies to react by, e.g., launching sales initiatives or increasing M&A activity. This interpretation is supported by internal and external evidence. Investors on average also recognize this situation, and stock prices react accordingly.

Keywords: Competitive Dynamics; Information Effects, Intra-Industry Effects, Leader Life Cycle, Top Management Turnover, Transition Period

JEL Classification: G14, G15