CEO Turnover, Leadership Vacuum, and Stock Market Reactions

Applied Economics, Forthcoming

39 Pages Posted: 10 May 2021

See all articles by Jeong Hwan Joo

Jeong Hwan Joo

Business Administration School, Ulsan National Institute of Science and Technology

Jihun Bae

Erasmus University Rotterdam

Date Written: May 1, 2021

Abstract

CEO departures with a delay in successor appointment create a leadership vacuum inducing operational disruption and strategic uncertainty. Such departures also produce turnaround benefits from cutting ties with a poorly performing CEO and by allowing additional time to search for a qualified successor. Prior studies fail to disentangle these perceived costs and benefits associated with CEO dismissal. After filtering out the turnaround benefits, we find the market reacts incrementally negatively to CEO departure announcements with a delay in successor appointment than those without such delay, capturing incremental switching costs caused by a leadership vacuum. We also find that the leadership vacuum cost is larger in a more volatile environment or with abandonment of a relay succession plan. Our findings contribute to CEO turnover literature by suggesting that a temporary leadership vacuum is an indicator of abandonment of a succession plan that has been influenced by a poorly performing CEO and that such abandonment creates an opportunity to achieve performance turnaround through a better successor.

Keywords: CEO turnover, interim CEO, leadership vacuum, turnaround benefit, switching cost, stock market reaction

JEL Classification: G14, G30, G34, M12

Suggested Citation

Joo, Jeong Hwan and Bae, Jihun, CEO Turnover, Leadership Vacuum, and Stock Market Reactions (May 1, 2021). Applied Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3842639

Jeong Hwan Joo (Contact Author)

Business Administration School, Ulsan National Institute of Science and Technology ( email )

Ulsan, Korea
Korea, Republic of (South Korea)

HOME PAGE: http://jeongjoo.unist.ac.kr/

Jihun Bae

Erasmus University Rotterdam ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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