Access

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

The Impact of CEO Turnover on Equity Volatility

Matthew C. Clayton, Jay C. Hartzell and Joshua Rosenberg
The Journal of Business
Vol. 78, No. 5 (September 2005), pp. 1779-1808
DOI: 10.1086/431442
Stable URL: http://www.jstor.org/stable/10.1086/431442
Page Count: 30
  • Download PDF
  • Add to My Lists
  • Cite this Item
We're having trouble loading this content. Download PDF instead.

Abstract

This study investigates the effect on stock‐price volatility of a significant event in the life of the firm, a change in its CEO. We find significant, long‐lived increases in volatility following CEO turnover after controlling for firm characteristics and marketwide volatility. These increases are larger after forced departures and outside successions following voluntary departures. Stock prices also respond more strongly to earnings announcements following turnovers. These results are consistent with more informative signals of value driving the increased volatility, helping resolve two sources of uncertainty: possible changes in the firm's strategy and doubt about the successor CEO's ability.

Notes and References

This item contains 51 references.

References
  • ['Barber, B. M., and J. D. Lyon. 1996. Detecting abnormal operating performance: The empirical power and specification of test statistics. Journal of Financial Economics 41:359–99.']
  • ['Bartov E. 1991. Open‐market stock repurchases as signals of earnings and risk changes. Journal of Accounting and Economics 14:275–94.']
  • ['Berkovitch E., and R. Israel. 1996. The design of internal control and capital structure. Review of Financial Studies 9:209–40.']
  • ['Bhagat, S., J. Brickley and U. Loewenstein. 1987. The pricing effect of interfirm cash tender offers. Journal of Finance 42:965–86.']
  • ['Black, F. 1976. Studies in stock price volatility changes. Proceedings of the 1976 Business Meeting of the Business and Economic Statistics Section, American Statistical Association, pp. 177–81.']
  • ['Black, F., and M. Scholes. 1973. The pricing of options and corporate liabilities. Journal of Political Economy 81:637–54.']
  • ['Bollen N. 1998. A note on the impact of options on stock return volatility. Journal of Banking and Finance 22:1181–91.']
  • ['Bonnier, K., and R. F. Bruner. 1989. An analysis of stock price reaction to management change in distressed firms. Journal of Accounting and Economics 11:95–106.']
  • ['Borokhovich, K. A., R. Parrino, and T. Trapani. 1996. Outside directors and CEO selection. Journal of Financial and Quantitative Analysis 31:337–55.']
  • ['Brown, K., W. Harlow, and S. Tinic. 1988. Risk aversion, uncertain information, and market efficiency. Journal of Financial Economics 22:355–86.']
  • ['Chambers, D. J., R. N. Freeman, and A. S. Koch. 2005. The effect of risk on price responses to unexpected earnings. Working paper, University of Kentucky, Lexington.']
  • ['Christie A. A. 1982.The stochastic behavior of common stock variances: Value, leverage and interest rate effects. Journal of Financial Economics 10:407–32.']
  • ['Cornell B. 1978. Using the options pricing model to measure the uncertainty producing effect of major announcements. Financial Management 7:54–59.']
  • ['Coughlan, A. T., and R. M. Schmidt. 1985. Executive compensation, management turnover and firm performance. Journal of Accounting and Economics 7:43–66.']
  • ['Dann, L., R. Masulis, and D. Mayers. 1991. Repurchase tender offers and earnings information. Journal of Accounting and Economics 14:217–52.']
  • ['Das, S., and B. Lev. 1994. Nonlinearity in the returns‐earnings relation: Tests of alternative specifications and explanations. Contemporary Accounting Research 11:353–79.']
  • ['Denis, D. J., and D. K. Denis. 1995. Performance changes following top management dismissals. Journal of Finance 50:1029–57.']
  • ['Denis, D. J., D. K. Denis, and A. Sarin. 1997. Ownership structure and top executive turnover. Journal of Financial Economics 45:193–221.']
  • ['Dewatripont, M., and J. Tirole. 1994. A theory of debt and equity: Diversity of securities and manager‐shareholder congruence. Quarterly Journal of Economics 109:1027–54.']
  • ['Dodd, P., and R. Ruback. 1977. Tender offers and stockholder returns. Journal of Financial Economics 5:351–73.']
  • ['Donders, M. W. M., and T. C. F. Vorst. 1996. The impact of firm specific news on implied volatilities. Journal of Banking and Finance 20:1447–61.']
  • ['Dubofsky D. 1991. Volatility increases subsequent to NYSE and AMEX stock splits. Journal of Finance 46:421–31.']
  • ['Ewing, J. 2000. Can Bertelsmann take wing? Business Week (February 7).']
  • ['Fee, C. E., and C. J. Hadlock. 2003. Raids, rewards, and reputation in the market for CEO talent. Review of Financial Studies 16:1311–52.']
  • ['Freeman, R. N., and S. Y. Tse. 1992. A nonlinear model of security price response to unexpected earnings. Journal of Accounting Research 30:185–209.']
  • ['Furtado, E. P. H., and V. Karan. 1990. Causes, consequences, and shareholder wealth effects of management turnover: A review of the empirical evidence. Financial Management 19:60–75.']
  • ['Gibbons, R., and K. J. Murphy. 1992. Optimal incentive contracts in the presence of career concerns: Theory and evidence. Journal of Political Economy 100:468–505.']
  • ['Grinstein Y. 2003. The disciplinary role of debt and equity contracts: Theory and tests. Working paper, Cornell University.']
  • ['Hallman, G., J. C. Hartzell, and C. Parsons. 2004. Carrots and sticks: The threat of dismissal and incentive compensation. Working paper, University of Texas at Austin.']
  • ['Hawawini, G., and D. B. Keim. 1995. On the predictability of common stock returns. In Finance, handbook of operations research and management science, ed. R.A. Jarrow, V. Maksimovic, and W. T. Ziemba, New York: Elsevier.']
  • ['Hertzel, M., and P. Jain. 1991. Earnings and risk changes around stock repurchase tender offers. Journal of Accounting and Economics 14:253–75.']
  • ['Hof, R. D., and G. Saveri. 1999. Inside an internet IPO, Business Week (September 6).']
  • ['Holmstrom B. 1979. Moral hazard and observability. Bell Journal of Economics 10:79–91.']
  • ['Huson, M. R., P. H. Malatesta, and R. Parrino. 2004. Managerial succession and firm performance. Journal of Financial Economics 74:273–75.']
  • ['Huson, M. R., R. Parrino, and L. T. Starks. 2001. Internal monitoring mechanisms and CEO turnover: A long term perspective. Journal of Finance 56:2265–97.']
  • ['Jayaraman, N., and K. Shastri. 1993. The effects of the announcements of dividend increases on stock volatility: The evidence from the options market. Journal of Business Accounting and Finance 20:673–85.']
  • ['Kalay, A., and U. Loewenstein. 1985. Predictable events and excess returns: The case of dividend announcements. Journal of Financial Economics 14:423–49.']
  • ['MacDonald G. M. 1982. A market equilibrium theory of job assignment and sequential accumulation of information. American Economic Review 72:1038–55.']
  • ['Mandelker G. 1974. Risk and return: The case of merging firms. Journal of Financial Economics 14:237–50.']
  • ['Mayhew, S., 1995. Implied volatility. Financial Analysts Journal 51:8–20.']
  • ['Mehran, H., and D. Yermack. 1997. Stock‐based compensation and top management turnover. Working paper, New York University.']
  • ['Mirrlees J. A. 1976. The optimal structure of incentives and authority within an organization. Bell Journal of Economics 7:105–31.']
  • ['Murphy K. J. 1986. Incentives, learning, and compensation: A theoretical and empirical investigation of managerial labor contracts. RAND Journal of Economics 17:59–76.']
  • ['Murphy, K. J., and J. L. Zimmerman. 1993. Financial performance surrounding CEO turnover. Journal of Accounting and Economics 16:273–315.']
  • ['Ohlson, J. A., and S. H. Penman. 1985. Volatility increases subsequent to stock splits: An empirical aberration. Journal of Financial Economics 14:251–66.']
  • ['Parrino, R. 1997. CEO turnover and outside succession: A cross‐sectional analysis. Journal of Financial Economics 46:165–97.']
  • ['Shavell, S. 1979. Risk sharing and incentives in the principal and agent relationship. Bell Journal of Economics 10:55–73.']
  • ['Vijh, A. 1994. The spinoff and merger ex‐date effects. Journal of Finance 49:581–609.']
  • ['Weisbach, M. S. 1988. Outside directors and CEO turnover. Journal of Financial Economics 20:431–60.']
  • ["———. 1995. CEO turnover and the firm's investment decisions. Journal of Financial Economics 37:159–88."]
  • ['White, H. 1980. A heteroskedasticity‐consistent covariance matrix and a direct test for heteroskedasticity. Econometrica 48:817–38.']