The Impact of CEO Turnover on Equity Volatility

40 Pages Posted: 27 Mar 2006

See all articles by Joshua V. Rosenberg

Joshua V. Rosenberg

Federal Reserve Bank of New York

Matthew J. Clayton

University of Virginia - McIntire School of Commerce

Jay C. Hartzell

University of Texas at Austin - Department of Finance

Multiple version iconThere are 4 versions of this paper

Date Written: May 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 1979-1995 period. We find that volatility increases following a CEO turnover, even when the CEO leaves voluntarily and is replaced by someone from inside the firm. Forced turnovers increase volatility more than voluntary turnovers - a finding consistent with the view that forced departures imply a higher probability of large strategy changes. For voluntary departures, outside successions increase volatility more than inside successions. We attribute this volatility change 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 firm size, changes in firm operations, and changes in volatility and performance prior to the turnover.

Keywords: CEO turnover, volatility, event study

JEL Classification: G34, G14

Suggested Citation

Rosenberg, Joshua V. and Clayton, Matthew J. and Hartzell, Jay C., The Impact of CEO Turnover on Equity Volatility (May 2003). FRB of NY Staff Report No. 166. Available at SSRN: https://ssrn.com/abstract=892812 or http://dx.doi.org/10.2139/ssrn.892812

Joshua V. Rosenberg (Contact Author)

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

Matthew J. Clayton

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/

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