The Importance of Board Quality in the Event of a CEO Death

Abstract

We examine board quality and executive replacement decisions around deaths of senior executives. Stock price reactions to executive deaths are positively related to board independence. Controlling for such factors as the deceased's stockholdings, outside blockholdings, board size, and whether the deceased was a founder, board independence is the most significant factor explaining abnormal returns. Board independence is particularly important when there is no apparent successor and firm performance is poor. The results are consistent with independent boards being reluctant to discipline poorly performing incumbent managers, but nevertheless using the opportunity of an executive death to improve the quality of management.

Lease Financing and Corporate Governance

“…Yermack (1996) and Core, Holthausen and Larcker (1999) find that firm performance is a decreasing function of the size of the board of directors, which suggests that as the number of board members increases, the efficiency of the board decreases. A recent paper by Borokhovich, Brunarski, Donahue and Harman (2006) indicates that investors have more confidence in the ability of independent boards to find a better replacement at the deaths of senior executives. Helland and Sykuta (2005) find that the likelihood of a company being sued by shareholders is associated with its board independence and size.…”

Board Independence and Mutual Fund Manager Turnover

“… See Weisbach (1988),Borokhovich, Parrino, and Trapani (1996),Hermalin and Weisbach (1998),Fairchild and Li (2005),Helland and Sykuta (2005), andBorokhovich, Brunarski, Harman, and Kehr (2006).6 Though rare, boards may take away the management contract from the original sponsor and award it to a new sponsor. See, for example, Ian McDonald, " 'Japan Funds' Board Stages a Revolt-Directors Ask Shareholders to Approve Severing Ties with Deutsch Bank," Wall Street Journal, July 15, 2007. p. C17.…”

An Exploratory Analysis of Factors Influencing Initial Market Response and Media Reports following Shock Corporate Events

“…The financial impact of CEO deaths also has prompted considerable research (labeled "the most macabre event studies ever performed" by Shleifer and Vishny, 1997, p. 747), with mixed results. Borokhovich, Brunarski, Donahue, and Harman (2006) find positive returns for three days after CEO deaths totaling about 2%. Salas (2010) finds a rise of 0.8% on the day after reports of the death of a chairman, president or CEO.…”

“…There is a paradox in equity valuations: new information is expected to have price impact (Fama, 1991), and yet decades of event studies have shown that abnormal returns following news of most corporate events average no more than a few percent and rarely last more than one day or two. This is true of a wide variety of events and settings, so that the small statistical signals of price impact disappear soon after CEO deaths (Borokhovich, Brunarski, Donahue, and Harman, 2006;Salas, 2010), industrial accidents (Barnett and King, 2008), earnings surprises (Greene and Watts, 1996), and "unanticipated events" (Brooks, Patel, and Su, 2003). There are few exceptions to this pattern, other than industry deregulation or similar "Schumpeterian shocks" (Pettus, Kor, and Mahoney, 2009), and targets of changes in control such as acquisitions (Moeller, Schlingemann, and Stulz, 2005), and initial public offerings (Ritter and Welch, 2002).…”