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Entrenchment, Governance, and the Stock Price Reaction to Sudden Executive Deaths

46 Pages Posted: 13 Oct 2005 Last revised: 23 Dec 2007

Jesus M. Salas

Lehigh University

Date Written: December 17, 2007

Abstract

I use the stock price reaction to sudden, unexpected senior executive (Chairman, CEO or President) deaths to study managerial entrenchment. If a highly effective manager dies unexpectedly, the stock price reaction should be negative. If however death removes an entrenched manager when the board would or could not, the stock price reaction should be positive. I find evidence that entrenchment is less likely if the board has a high proportion of outsiders but little evidence that other proposed good governance practices are able to prevent managerial entrenchment. While individually age and tenure are only weakly correlated with the stock price reaction to a sudden death, the reaction is strongly positive (5 to 7%) if (1) the executive's tenure exceeds ten years and (2) abnormal stock returns over the last three years are negative. In a number of cases, part of the reason for the positive stock reaction to sudden executive deaths is apparently because in the stockholders' view, an obstacle to a takeover has been removed.

Keywords: Entrenchment, Corporate Governance, Firm Value, Takeovers, Executive

JEL Classification: G33, G35, G39

Suggested Citation

Salas, Jesus M., Entrenchment, Governance, and the Stock Price Reaction to Sudden Executive Deaths (December 17, 2007). AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=819564 or http://dx.doi.org/10.2139/ssrn.819564

Jesus M. Salas (Contact Author)

Lehigh University ( email )

Bethlehem, PA 18015
United States
610-758-3238 (Phone)

HOME PAGE: http://www3.lehigh.edu/business/faculty/salas.asp

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