The Impact of CEO Turnover on Equity Volatility*

Abstract

A change in executive leadership is a significant event in the life of a firm. Our paper investigates a potentially significant consequence of a CEO turnover: a change in equity volatility. We develop several hypotheses about how CEO changes might affect stock price volatility, and test these hypotheses using a sample of 872 CEO changes over the [1979][1980][1981][1982][1983][1984][1985][1986][1987][1988][1989][1990][1991][1992][1993][1994][1995] period. We find that volatility increases following a CEO turnover, even for the most frequent type, when a CEO leaves voluntarily and is replaced by someone from inside the firm. Our results indicate that forced turnovers, which are expected to result in large strategy changes, increase volatility more than voluntary turnovers. Outside successions, which are expected to result in a successor CEO with less certain skill in managing the firm's operations, increase volatility more than inside turnovers. We also document a greater stock-price response to earnings announcements around CEO turnover, consistent with more informative signals of value driving the increased volatility. Controls for firm-specific characteristics indicate that the volatility changes cannot be entirely attributed to factors such as changes in firm operations, firm size, and both volatility change and performance prior to the turnover.1

Human Resources Turnover as an Asset Acquisition, Accumulation and Divesture Process

“…Despite the advantages of analyzing specifically the sports industry, more research is necessary in order to see if comparable results can be obtained in other industries or on the basis of alternative firm performance metrics, respectively. Moreover, along the lines of Clayton, Hartzell & Rosenberg (2005), it would be instructive to investigate the impact of human resources turnover on stock price volatility. These will be the objectives of future research.…”

Stock market volatility around national elections

“…This inquiry closely follows the approach of Dubofsky (1991) and Clayton et al (2005) in that the dependent variable is defined as the natural logarithm of the pre-event and event window volatility ratio. The application of the log transformation to the variance quotient reduces the skewness of the underlying data and thereby leads to more reliable t-statistics.…”

Abnormal Stock Returns and Volume Activity Surrounding Lodging Firms' CEO Transition Announcements

“…In conjunction, volatility in firms' stock prices following CEO transitions were also found to be higher for forced transitions than voluntarily or planned transitions (Denis and Denis, 1995). With regard to time period impact of executive transitions, another seminal study by Clayton et al (2005), employed a volatility event study methodology, which uses the log ratio of post-event to pre-event standard deviations. The authors found that volatility increases significantly in the first year following executive transitions of any type, with the highest volatility found in the first year following forced transitions (Clayton et al, 2005).…”

“…With regard to time period impact of executive transitions, another seminal study by Clayton et al (2005), employed a volatility event study methodology, which uses the log ratio of post-event to pre-event standard deviations. The authors found that volatility increases significantly in the first year following executive transitions of any type, with the highest volatility found in the first year following forced transitions (Clayton et al, 2005). Given the importance of CEOs and CEO transitions for organizations, Lubatkin et al (1989) analysed the relevant horizon lengths that could be utilized to measure the impact of CEO transitions on organizations, and noted that although the typical two-day announcement period prevalent in the literature might be relevant, the impact of CEO transition on stock price could and should be measured across a variety of periods.…”