“IMPACT OF CEO TURNOVER ON STOCK PRICES

by

ANCHAL SUBHASH RAJPAL”

“Dissertation Supervisor: Dr. Jelena Janjusevic

Word Count: 12660

Dissertation submitted in partial fulfillment

of the degree of MA (Hons) in

ACCOUNTANCY AND FINANCE

at

School of Management and Languages

Heriot-Watt University

Dubai Campus

MARCH, 2019”

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 “Acknowledgments”

“First and foremost, I would like to thank my dissertation supervisor Dr. Jelena Janjusevic for
her continuous support, encouragement, and guidance which has enabled me to complete this
dissertation to the best of my capabilities.

Secondly, I would like to thank Dr. Ullas Rao as conducted the event study workshop that
enabled me to conduct the analysis of this research project, he was also kind enough to help out
when approached.

I would also like to family for all their love and support throughout this endeavor

Last but not least, I would like to express my gratitude towards my friends Rhea Chhugera,
Navya Seetha, Farha Rajeev, Evana Kuruvilla, and Evita Kuruvilla, who were constantly
motivating and encouraging me.”

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 “Declaration of Authorship”

“I, Anchal Rajpal, declare that this dissertation embodies the result of my own work and has
been composed by me. Where appropriate, I have made full acknowledgment of the work and
ideas of others or have made reference to work carried out in collaboration with others. I have
read and understood the SML Undergraduate Dissertation Courses: Regulations and Procedures.
I confirm that I obtained ethical approval for my study in the approved manner. I understand that
as an examination candidate I am required to abide by the Regulations of the University and to
conform to its discipline and ethical policy.”

Signature:

Date:

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 Abstract

Research Aim: The aim of this research to determine the impact CEO turnover has on the stock
prices of companies in the US market.

Methodology: The paper uses an event study methodology with a sample of 25 observations. The
companies in the sample were obtained by selecting companies on the NASDAQ stock exchange
with a CEO turnover in the past 5 years. The observations were selected according to those
which had the highest market capitalization and the criteria mentioned.

Findings: The overall findings from the event study analysis used were insignificant, thus, the
market does not react to CEO turnover. However, some companies such as Walgreens Boots had
significant results. The cumulative average abnormal returns also found one event window to be
significant, this event window considered 3 days prior to and 3 days after the event has taken
place.

Limitations: Due to the time constraints, a small time period was used to conduct this study, as a
result, it is not possible to take a deeper dive into this topic. The Data used for the study is taken
from Thompson one and as a result, the study is relying on the accuracy of the data available on
this database.

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“Table of Contents”

“Chapter 1: Introduction......................................................................................................................8
1.1. Introduction...............................................................................................................................8
1.2. Background of Research Topic.................................................................................................9
1.3. Research Question, Aims and Objectives...............................................................................10
1.4. Research methodology.............................................................................................................10
1.5. Findings of the Study...............................................................................................................11
1.6. Research Gap and Contribution to the Literature................................................................11
1.7. Structure of the dissertation....................................................................................................12
Chapter 2: Literature Review.................................................................................................................12
2.1. Introduction..................................................................................................................................12
2.2. Overview of CEO turnover..........................................................................................................13
2.3. Reasons for CEO turnover...........................................................................................................14
2.4. Underlying theories......................................................................................................................14
2.4.1. Agency theory........................................................................................................................14
2.4.2. Efficient Market Hypothesis.................................................................................................16
2.5. Empirical evidence.......................................................................................................................17
2.5.1. Stock market reaction to turnover.......................................................................................17
2.5.1 CEO turnover and investment decisions...............................................................................20
2.7. Routine and Non-routine CEO turnover................................................................................20
2.8. CEO turnover and bondholder value......................................................................................21
2.8. Inside versus Outside Directors...............................................................................................22
2.6. Summary...................................................................................................................................24
Chapter 3: Methodology.........................................................................................................................27
3.1. Introduction..................................................................................................................................27
3.2. Research Philosophy and paradigm............................................................................................27
3.3. Data Collection..............................................................................................................................28
3.4. Data Analysis................................................................................................................................29
3.4.1. Market model..........................................................................................................................31
3.4.2 Regression analysis.................................................................................................................31
3.4.3. Calculation of CAR and CAAR............................................................................................32
3.5. Data analysis tools........................................................................................................................33

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 3.6. Research Ethics.............................................................................................................................33
3.7. Limitations of methodology.........................................................................................................34
3.8. Summary.......................................................................................................................................34
Chapter 4: Analysis and Findings..........................................................................................................35
4.1. Introduction.............................................................................................................................35
4.2. Results of Event Study.............................................................................................................35
4.2.1 Pre-Event Windows................................................................................................................35
4.2.2. Pre-Post event Windows..................................................................................................36
4.2.3. Post Event Windows........................................................................................................38
4.2.4. Average Abnormal returns.............................................................................................40
4.2.5. CAAR values....................................................................................................................41
4.3. Discussion of Findings.............................................................................................................42
4.4. Conclusion................................................................................................................................44
Chapter 5: Conclusion.............................................................................................................................45
5.1. Introduction..................................................................................................................................45
5.2. Dissertation Overview and Findings...........................................................................................45
5.3 Limitations of study and Future Research..................................................................................46
5.4. Self-Reflection...............................................................................................................................47
References...............................................................................................................................................48"

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 “List of tables”

“
Table 2.1: Overview of Literature Review 25"
"Table 3.2:Hypotheses to be tested..............................................................................................30"
"Table 4. 3:...................................................................................................................................35"
"Table 4.4.....................................................................................................................................37"
"Table 4.5.....................................................................................................................................38"
"Table 4.6.....................................................................................................................................40"
"Table 4.7.....................................................................................................................................41"

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 List of Abbreviations

CEO- Chief Executive Officer

CAR- Cumulative Abnormal Returns

CAAR- Cumulative Average Abnormal Returns

OLS – Ordinary Least Squares

EMH- Efficient Markets Hypothesis

CAPM- Capital Asset Pricing Model

NYSE- New York Stock Exchange

S&P – Standard and Poor

SEC -Securities and Exchange Commission

US- United States of America

UK – United Kingdom

CRSP tapes- Center for Research in Security Prices from the University of Chicago

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 Chapter 1: Introduction
1.1. Introduction
This chapter is subdivided into six parts, section 1.2. provides a background on the research
topic for this study, section 1.3. gives an overview of the research that is, the aims and
objectives. The finding of the paper is listed out in section 1.4., section 1.5 list the method of
study used. The contribution made by the study to literature is mentioned in 1.6. Lastly, the
structure of this dissertation has been put in section 1.7.
1.2. Background of Research Topic
Stock markets are volatile, and some companies perform better than others in the market, a
crucial role in the success of some companies over others is the leaders of said companies.
The leaders are the ones making the strategic decisions and implementing them and thus they
are the ones responsible for the growth and success of the firm.
In any corporation, the most senior official is the Chief Executive Officer (Andrews, 1987).
Thus, CEOs make a lot of the crucial strategy and planning decisions for the company, they
also influence the corporate culture of the organization, they have they enough power in the
organization to bring about other major changes in the organization (Rhim, Peluchette and
Song, 2006).
According to Andrews (1987), the responsibilities of a CEO include, making plans and
executing those, another responsibility is rendering an evident contribution to the
organisation, it also includes attaining human satisfaction in the company. The CEO of a
company is also its most discernable representative.
Due to the critical role played by the CEO, replacing him/her is also a very complicated
process. Due to this, the news on executive turnover has always interested not only investors
but also all other stakeholders of the company. The investors of the company tend to get
nervous when such changes in executive level positions are announced. Thus, following the
efficient market hypothesis, the market can respond positively or negatively to the change.
Firm performance due to CEO turnover is a thought-provoking topic, since the turnover can
happen due to multiple factors, it could be as simple as a succession or it can be quite
complicated, as it is also possible that the CEO is being forcefully removed due to agency
problems, in this situation however, the reason behind the departure of the CEO is not
entirely disclosed instead a vague statement is released by the company due to the

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 shareholders trying to protect the image and reputation of the company, in any case, it is
important to observe the market reaction to such announcements and in some cases how the
market reacts when the new CEO assumes his/her new role. In the case of death of the CEO
the stock market never reacts positively, as this leads to chaos in the companies quite often
(Johnson, Nagarajan and Newman,1985).
According to Furtado and Karan (1990), “A CEO turnover event as a significant event in the
life of the corporation which can determine its future direction and subsequent financial
performance.” As a result of this, when a CEO turnover takes place the shareholder's wealth
is volatile and thus share prices tend to fall. Taking Apple and Steve Jobs for instance, with
the announcement in 2011, that CEO and Chairman Steve Jobs would be taking a sick leave
Apple’s share price took a dip of 8.4%, the company thus lost billions of dollars.
Despite multiple studies having been conducted on this subject, the results are contradictory
thus making it difficult for any substantial conclusion to be drawn.
1.3. Research Question, Aims and Objectives
The research question for this study is: Does CEO turnover have an impact on stock prices?
Evidence from the US markets.
The research aim for this study is determining if the appointment of a new CEO has an
impact on the stock prices of a company this will be done by checking the abnormal returns
when the event occurs. The research objectives used to achieve the aim are:
 Identifying the event windows for which the data has to be collected and analyzed.
 In order to determine the impact that appointing a new CEO will have on the market
prices of a company, the event study methodology will be employed.
 Contributing to the pre-existing literature available on this topic is also one of the goals
of this study.
1.4. Research methodology
The research uses a positivist epistemology and objective ontology as the research
paradigm. The research is thus quantitative in nature, the data sources used are
ThompsonOne and Yahoo finance.

The method of study is the event study methodology. in order to employ the event study
methodology, the following steps will have to be done, step one will be determining the

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 event date, step 2 is determining the clean window that is, the days prior to the event that
is not impacted by the event or speculation of the event. The next step is determining the
event windows to be used for conducting the event study as multiple windows are more
likely to give significant results. After the event windows have been determined, an OLS
(ordinal least squares) regression also known as the linear regression will be run in order
to determine the α and the β of the market, these refer to the intercept and the volatility of
the market respectively.

The fourth step is computing the abnormal returns, the market model has been chosen for
conducting this research during the recommendation of the literature studied, the
abnormal return is calculated by taking the difference between the actual return of the
security and the expected return of the security.

The fifth step is the calculation of the t-statistic. Based upon this the hypothesis for CAR
values will be accepted or rejected. The next step is calculating the average abnormal
returns after which the cumulative average abnormal return is found by taking a total of
all the abnormal returns on that event day. finally, the t-statistic value for CAAR will be
found and the hypothesis based on the CAAR values will be accepted or rejected.

1.5. Findings of the Study

The study finds that the NASDAQ stock exchange does not have significant changes in
returns due to a CEO turnover event, however, the sample studied in this paper is small
and thus, using a bigger sample to conduct the study might provide more significant
results.

The data analysis was done using the Market Model to calculate the abnormal returns,
after which the CAR and CAAR values were found based on these values a t-statistic was
found determining the significance of the event. It was however found that Walgreens
Boots had consistently negatively significant returns, the reason behind this was found to
be allegations again the CEO and other executives of Walgreens regarding concealment
of the financial risk being incurred in the merger with Alliance Boots.

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1.6. Research Gap and Contribution to the Literature
A lot of research has been done over the years in regards to the effect CEO turnover has
on the stock market prices of companies. Since the previous literature is conflicting it is
difficult to determine the extent of the impact a CEO turnover will have on the market
since often times there are multiple things happening within the same time frame. As
opposed to previous literature which mostly uses the NYSE, choosing the NASDAQ
index might provide a more wholesome picture of the US markets.

1.7. Structure of the dissertation.

The structure of the dissertation is as follows: the theoretical context and empirical
evidence on the research topic are provided in chapter 2. Chapter 3 discusses the best-
suited research methodology to conduct the study and various models used for the
calculation of returns. The findings and analysis obtained by performing the tests are
described in chapter 4. Chapter 5 concludes the dissertation by highlighting the findings,
the limitations of the study and areas for future research are also suggested.

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 Chapter 2: Literature Review
2.1. Introduction
The previous chapter introduced the topic of CEO turnover, this chapter will be giving an
overview of the previous literature on CEO turnover in section 2.1, in section 2.2 the reasons for
turnover have been explained. Section 2.3 section elaborates upon the underlying theories for
this study, the next section focuses on the previous literature on stock market reaction to CEO
turnover, the final section of this chapter will provide a summary of the chapter.

Through the literature available, this study aims to observe the impact the made on the market on
the announcement of CEO turnover, whether the market reacts positively or negatively is also
going to be examined. This study also aims to establish the relationship between the initial
market reaction, thus the study is only concerned with the short term reaction of the market that
is, the study is myopic in nature.

2.2. Overview of CEO turnover

According to Hambrick and Mason (1984), an organisation can be perceived to be a reflection of
its top-level executives and the quality of decisions made by them, this is in accordance with the
strategic leadership theory. Since the CEO is the topmost level company executive, turnover in
this position implies not just a change in the operations of the company but also leads to a change
in the predominant norms and expectations of company employees. The employees are not the
only part of the organisation impacted either, the political and economic conditions of the entity
are impacted as well. Thus, it can be said that the entire power structure in a firm is transformed
when there is a change in the CEO.

Scholars such as Warner, Watts, and Wruck (1988) have researched the impact of turnover in top
executives as opposed to a more focused study in the changes in the CEO, however, there are
many ways in which turnover in top-level executives is different from a CEO turnover, one of
the main reasons behind this is as mentioned previously, the CEO of an organisation is very
visible not only to the employees or the associates of the said companies, they are also the most
visible in the eyes of the public and thus, the face of a CEO always represents the face of an
organisation (Beatty and Zajac, 1987). According to Beatty and Zajac (1987), the CEO of a
company is the members of the company that is “most likely to make a difference” in the firm.

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Leading up to CEO turnover once the announcement is made, before the turnover has even taken
place there is a lot of assumptions made about the firm since sometimes a change in CEO leads
to a through re-structuring of the firm, thus all stakeholders whether internal or external are all
wary of such a change taking place.

It is sometimes said that the position of a CEO is such that, it is rarely the case that it can be said
that two days were relatively the same. Thus, the routines of a CEO is usually less structured and
less routine as well.

Due to the important role of a CEO in an entity, turnover is avoided until necessary, since the
directors believe it to cause more chaos than it is worth. However, in 2010 Favaro, Karlsson and
Neilson conducted a study which displayed that the tenure of CEOs recently has reduced and
become more intense as well. The study concluded that the tenure period dropped from 8 years
to 6 years.

A recent study by Saidu (2019) examines the effect CEO ownership, education and origin would
have on the performance of a company, it tested firms on the Nigerian stock exchange. The study
found that the education of the CEO impacts the profits made by the firm as it is also seen to be
profitable for the company if there have been any prior dealing of the CEO with the company as
a result promoting internally is beneficial to the firm.

CEO turnover is also a costly and time-consuming process since the most-effective and best
candidate for the position needs to be found, thus the selection process is very intricate. The
decision to hire or fire a CEO falls in the hands of the Board of Directors of the company. This
can sometimes complicate matters as directors do not necessarily have a management
background and they also have limited knowledge about the company.

2.3. Reasons for CEO turnover

There are typically four reasons for the CEO stepping down, these are, retirement, resignation,
dismissal, and death. However, studies conducted such as ones by Warner, Watts, and Wruck
(1988) and Denis and Denis (1995), illustrated the most common reason for CEO departures is
usually retirement, followed by forced resignation, however, press releases usually do not state
any reasons or motives behind the departure. Weisbach (1988) also concludes the same.

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It is emphasized by Shen and Canella (2003) that despite the reason for turnover, the planning
needed for a turnover is of immense importance.

2.4. Underlying theories

The main underlying theories in the study are agency theory and efficient market hypothesis.
2.4.1. Agency theory
Agency theory refers to the principal-agent problem, that is the shareholders (principal)
appoints the agent (the managers) in order to operate on their behalf, thus, agency
problems are caused due to the separation of ownership from control (Shleifer and
Vishny, 1997).

Some of the problems associated with agency theory are; perfect information is not
easily available thus making performance measurement harder; monitoring is costly in
terms of money, effort and time, this refers to the cost incurred by the principle in order
to keep an eye on the agent to ensure he/she is acting in the interest of the organisation
and not in their own self-interest (Panda and Leepsa, 2017).. The problem of moral
hazard is created as agents may act in an opportunistic manner, that is, they may act in
their own self-interest in order to increase their own wealth as opposed to the wealth of
the shareholders, which is the eventual goal for every organisation (Panda and Leepsa,
2017).

Agency costs are used as a way to overcome these problems. These agency costs can be
the monitoring costs, the bonding costs or the residual loss. Monitoring costs are incurred
by the principle to monitor the activities of the management, this is done by the board of
directors as they are appointed by the shareholders in order to maintain control over the
management of the organisation, for instance, monitoring costs include the cost of
conducting audits, another manner in which the management can be monitored is through
reducing the power of the management, by means of reducing their decision making
power. The bonding costs are incurred by the agent assuring the management that they
are functioning in the best interests of the shareholders, this includes contractual
agreements to have the financials audited by a public accountant. Residual loss occurs
when the interest of the principle and the agent are separate. Executive power and pay
will also play a small role in the study. Although, incurring agency costs to combat

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 agency problems also has issues which include poor financial performance, reduction in
shareholder value, limited access to capital and higher cost of capital. An example of
agency costs is found in the paper by Weisbach (1988) which depicts the behavior of
inside and outside directors differs in relation to their decision to remove top
management.

Jensen and Meckling (1976) suggest that since the board of directors are charged with the
appointment of executives as well as their dismissals, the agency theory plays an
important role, due to the dual role played by CEO and the chairman of the board would
be extremely difficult to dismiss him/her even if the firms performance is poor especially
if the board consists mainly of inside directors working under the CEO, board
composition is thus crucial to the proper functioning of an organisation. As a result,
maintaining an independent board is one of the key concerns of any organisation, this is
done by hiring outside directors (Fama and Jensen, 1983).

As previously stated, the external directors are very important to the firm specifically due
to their independence from the directors also due to their knowledge and experience.

2.4.2. Efficient Market Hypothesis

As the study conducted will be using the event study methodology in order to analyse
data, that is when an event study is used the significance of the results will be tested
according to how efficient the market is. The efficient market hypothesis states that the
market at all times reflects all the available information about a company (Fama, 1970).
Thus, it implies that straightaway, share prices are able to reflect all the new information
existing in the market.

The efficient market hypothesis has three forms, these are as follows, the strong form
efficiency, the semi-strong form efficiency as well as the weak form market efficiency
(Bodie, Kane, and Marcus, 2014). According to the weak form market efficiency, only
the historically available information reflected in the market prices, while according to
the semi-strong form market efficiency the share prices reflect all the information which
is available publicly; finally, according to the strong form efficiency the market reflects
all the information that is available publicly as well as the insider information(Bodie,
Kane and Marcus, 2014). According. Thus, we can say that strong form efficiency is not

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 possible since giving out insider information is considered illegal (Bodie, Kane and
Marcus, 2014). As a result, we can say that the prices being examined in the event-study
analysis will be of a semi-strong market as it will be evaluating the price of securities
based on all the publicly traded information as well as the historical prices of the
securities (Bodie, Kane and Marcus, 2014).

2.5. Empirical evidence

2.5.1. Stock market reaction to turnover
The study conducted by Warner, Watts and Wruck (1988) researched the market reaction
of 269 firms listed on the NYSE upon announcement of changes in the top management
of the firms, the study concluded that firms experience negative abnormal returns upon
announcement due to two effects, these are, firstly the negative information effect, this
effect implies that the stock market prices are reflecting upon the previous performance
of the firm; the second effect is the positive real effect, this effect mulls over the
perception for shareholders interest. This study used the event study methodology and the
cross-sectional analysis with the data analysis technique being logit studies as well as
monitoring of daily and monthly abnormal returns.

Bonnier and Bruner (1989) analysed the impact of the change in the top management of
distressed firms on the share prices of the companies; the study also made use of the
event study methodology and the cross-sectional analysis. aimed to estimate the real
impact, a change in senior management would have on the firm’s performance by using a
sample of companies in their study that were displaying poor performance before any
announcement regarding the change in management had been made. Their study
suggested that internal control mechanisms prior to the change play a crucial role in
determining how the market would react to such an announcement, and thus choosing
such a sample, they were trying to eliminate the negative information component.

The authors claimed, if the shareholders benefited from the change in leadership the
study would be able to identify it due to positive abnormal returns. The criteria that were
used to identify poor performance in firms were negative earnings as well as the omission
of dividend payments prior to management change. the method of study used was a
cross-sectional analysis namely, the study analyzed the company in terms of companies

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within the industry as well as industries operating in similar areas. The study concluded
the company’s performance is portrayed in a bad light due to change in management
despite the main objective behind this being shareholders wealth maximization, it also
stated the positive abnormal returns obtained post-announcement are influenced by the
power of the position being filled.

Bonnier and Bruner (1989) studied the companies listed on the NYSE in the Standard and
Poors (S&P) index between 1969 and 1983. The study began by analysing all the listed
companies and then selected those that were underperforming in the market, this left a
sample of 70 companies to be analysed, which made about 87 management changes in
the years studied.

A study conducted by Dedman and Lin (2002), examined the impact CEO departure
would be having in firms located in the United Kingdom. The research depicted that
turnover announcements are often made along with other announcements about the
company, the implication of this being that the other news released in regards to the
company has the potential of concealing the bad news of the CEO departure. Thus, it
concluded that the market would not react to the turnover when the news of turnover is
released along-side the replacement announcement. The sample studied by Dedman and
Lin (2002) included 251 firms, which were studied between 1990 and 1995. The FTSE
index was used to conduct the study. The method of study was event study with the data
analysis techniques being used the t-test and Patel's standardized residual statistics; the
market model was used in order to conduct the data analysis.

Kang and Shivdasani ( 1996) undertook research on corporate governance and top
executive turnover in Japan in the time period of 185 and 1990, the results of the study
concluded that the market reacts positively as well as significant to the CEO turnover. the
sample size used for the purpose of the study was 439 observations, analysed on the bases
of event study methodology.

A study published by Suchard, Singh, and Barr (2001) on the topic of “market effects of
CEO turnover in Australia” found negative results, thus, it is consistent with the results
found by Dedman and Lee (2001). The methodology used is the event study methodology
with 59 observations. These observations were observed across 5 years.

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The research was undertaken by Dahyaa and McConnel (2003) discuss the Cadbury code
of conduct, the corporate governance an the board composition of various companies in
the United Kingdom stock market, a sample of 523 companies from the FTSE index, the
paper used event study methodology to carry out the analysis and found positive results.
Despite both Dedman and Lin (2002) as well as Dahyaa and McConnel (2002)
conducting their research in the United Kingdom and taking relatively big samples, both
papers have contradicting results.

The study conducted by Beatty and Zajac (1987) states that the succession- performance
relationship in the company is a function of two different and complementary concepts,
that is, the manger effects and the CEO effects. The event study methodology was used to
conduct the research with the use of cross-sectional and longitudinal analysis. The tests
conducted included the t-test and the Chow (1960) ANCOVA test. The study assessed
the data of 209 companies listed on the NYSE, in the S&P index. The market model was
used in order to obtain abnormal returns during the event period. Finding made by Beatty
and Zajac (1987) conclude that when large firms release turnover announcements, a
negative yield is incurred post-announcement.

Coughlan and Schmidt (1985) examined the impact internal control mechanisms
exercised by the board of directors of a company have on the management; the internal
control mechanisms refer to the compensation paid to companies executives and the
benefits provided to them by the company. the control mechanisms also refer to the
power held by the board to dismiss the executives, as the threat of removal will
incentivize the management to act in the interest of the shareholders. The method of
study used to was the event study methodology. The data collected for the study range
was between the years 1977 and 1980; the sample used includes 276 companies, these
were split up according to the age group of the CEOs, of the sample, 216 of the CEOs
were categorized as the younger CEOs while the remaining were considered the older
CEOs. The index used for data collection is the FTSE and the tests run on the data
include the logit regression and the F-test. The study found, by setting compensation,
benefits and change policies for the management, the boards are able to reduce the

19
 principle-agent problem, that is, the management interests align with the interests of the
shareholders.

A study by Chang, Dasgupta, and Hilary (2010) examines the stock market reaction
between 1992-2002 to the departure of CEOs, thus the market reaction is being compared
to the past performance of the company. the method of study being used is an event
study. While conducting the study 435 companies with CEO departures are recognized,
out of these observation 54 observations are lost due to the companies being unlisted. The
study analyzes the data collected with the help of tests such as CAR (cumulative average
return), residual CAAR( cumulative average abnormal returns) and the prior performance
of the firm is calculated, the index used for data collection is the S&P index. The
conclusion drawn was both the departure of the new CEO as well as the previous CEO
departing from the company impact the share prices as well as the expected difference in
ability between the two.

2.5.1 CEO turnover and investment decisions.

The changes made in investing and financing policies have been linked to an executive
turnover by a few scholars in the existing literature such as Weisbach (1995) and Denis
and Denis (1995), both these studies display a connection between executive turnover
with increased asset restructuring. The focal point of Weisbach (1995) study was to
analyze the relationship between CEO changes and corporate divestitures. The data for
this research was collected by considering those American firms which were able to
consider acquisitions of $100 million minimum between the years of 1971 and 1982, the
sample size was reduced to 271 observations. The study was conducted using logit
regression. The paper concludes a part of the process of reversing managerially-
motivated acquisitions is CEO turnover, it also states that the poor decisions made by the
company previously can be reversed by changing the management of the organisation.

The paper by Denis and Denis (1995) aimed to examine how forced turnover of the top-
level management would impact company performance, the study displays forced
dismissals of top-level executives are due to declining firm performance and thus the
changes made show a significant increase in operating performance. The method of study
employed to conduct the research was the event study methodology, which tested a

20
 sample of 721 firms with changes in top management. Under the event study, t-test and
the Wilcoxon signed rank test was used.

2.7. Routine and Non-routine CEO turnover

CEO succession can be of two types. The first type of turnover is routine turnover where the
CEO is retiring and someone else will be appointed to take this place. The second type is non-
routine as in this type of turnover, appointing a new CEO becomes necessary due to death,
agency problems or political pressure, this type would mostly arise alongside agency problems as
it is most likely to arise due to a scandal. In the study conducted by Denis and Denis (1995), out
of the total sample used, 69 observations out of the total observations were non-routine while the
remaining observations were routine, the study conducted found that the market reacted
positively to both cases, however the significance of the non-routine observations was higher,
this implies that the reaction of the market is bigger when the turnover is not routine in nature.
the method of study as mentioned previously is the event study methodology.

In Denmark, in the sample period of 1994 until 1998, Neumann and Voetmann (1999) conducted
a study that investigating the reaction of the market when out of a total sample of 81, the non-
routine transactions were 39, while the remaining 42 observations were voluntary in nature, the
event study conducted on this sample showed positive market reactions towards non-routine
changes and vice versa.

Thus, the studies conducted by Denis and Denis (1995) and Neumann and Voetmann (1999) do
not coincide, this could be because the nature of investors in Denmark is different from the
nature of investors in the United States markets. As a result of the difference in characteristics of
investors in each country, contradictory results can be found. A study by French researcher
Dherment-Ferere and Reneboog (2000) coincides with the results of Neumann and Voetmann.

The study conducted by Dedmen and Lin (2002) also included both types of turnovers, the
breakup of their sample was as follows, 22 normal turnovers took place, while 28 voluntarily
sighed of, 24 were fired and 10 stepped down to take up positions in other industries. The study
concluded that the investors in the United Kingdom are averse to new CEOs as a result of this,
the study found negative market reactions to CEO turnover particularly when it was not a normal
routine turnover that is, voluntary sign off, departure to join another company as well as fired
were all the scenarios in which negative returns were found.

21
2.8. CEO turnover and bondholder value
Some recent studies on CEO turnover compare the impact on bondholders as well as
shareholders when the announcement is made, such as Campbell and Taksler (2003) and
Landschoot (2008) which justify variations in bond return due to firm-specific volatility
while Clayton, Hartzell, and Rosenberg (2005) reports an increment in future equity
volatility due to changes in certain policies such as the investing and financing policies
accompanied by ambiguity in the future operating performance. Variations in bond yields
are explained by Campbell and Taksler (2003) and Landschoot (2008) indicating that the
pricing of corporate bonds is greatly impacted by equity volatility. Adams and Mansi
(2008) suggested bondholders are negatively impacted by CEO turnover while it is
beneficial to the shareholders, thus indicating a transfer of wealth from bondholders.

Adams and Mansi (2008) associates lower bondholder values with high stockholder
values, also, the turnover type, whether the turnover is forced or voluntary as well as
whether the succession is done within the firm or from outside that is the net changes
being made, and the riskiness of the company’s debt (investment or non-investment).
Thus, it is found that CEO turnover is an extreme form of a corporate governance
mechanism, especially on bondholders. Clayton, Hartzell, and Rosenberg (2005) show
similar evidence.

2.8. Inside versus Outside Directors

A recent study by Georgakakis and Ruigrok (2016), aimed to analyze the benefits and
costs of hiring an outside CEO to fill in the vacated spot. This study was based on
companies in the European markets specifically, the UK, Germany, Switzerland, and the
Netherlands. The data collected to conduct the study included a sample of 109 CEO
successions in large firms between the years 2005 and 2009, the sample was decided by
ranking all listed firms based on their market capitalization. Four counties were chosen
for this study as it is a cross-sectional and multi-level study. The analyses of the study
were done using a hierarchical-linear-modeling (HLM) technique and Heckman’s (1979)
two-step procedure was also employed. Variance inflation factor (VIF) tests in Stata 13
were also run. The study found two advantages when an outside CEO is appointed, social
demographic of the entity resembles current managers; secondly, the CEO possesses a

22
vast range of experience. The study concluded it was easier for inside successors to adapt
in the short-run, however in the long run as the CEO interacted with the members of the
industry, they got embedded within the industry. Finally, the research also stated that the
firm performance improved when CEOs were plucked from outside the labor market as
they possess more skills and knowledge similar results were obtained by Jalal and Prezas
(2012).
Jalal and Prezas (2012), the article evaluated CEO succession and firm performance
when the new CEO was an outsider. The limitation of this study, however, was the event
period began when the new CEO commenced his work as opposed to the day the
announcement was made thus it did not paint a very accurate picture since an efficient
market would have already reacted to the announcement.
Furtado and Rozeff (1987) evaluated the frequency of appointment from within the
managerial labor market versus external appointment however, it did not take into
consideration resignation and retirement while analyzing management changes; the study
concluded internal promotions are more favorable in larger firms since this displays the
human capital investment program is valuable. the analysis was drawn through t-test and
CAAR (cumulative average abnormal return) value.

The purpose of Weisbach (1988) was determining whether there is a correlation between
CEO performance and if they were appointed by outside or inside the board of directors.
The method of study used was the event study methodology; the model used to calculate
the abnormal returns under event study was the market model, based on this approach the
research paper made use of simple regression analysis. It found that the firm value is
increased when the CEO is appointed by outside directors. The study comprised of a
sample size of 456 firms, of these 220 were used for returns equations while 208 were
used were earnings equations. The study concluded that value is added to the firm during
CEO turnover when the board is outsider dominated, this was especially the case when
turnover occurred due to the poor performance of the CEOs.

Thus, the study conducted by Weisbach (1988) was similar to that of Borokhovich
(1996) which found CEO succession and the percentage of an outside board of directors

23
 have a strong positive correlation given that outside appointments are seen to be more
valuable to the shareholders when changes in firm policies are crucial.

Political changes also impact the board structure which in turn impacts the decision in
selecting a new CEO. After the Enron scandal in 2001, the United States government
implement the Sarbanes-Oxley Act based upon which there were requirement changes
that companies had to comply with in order to remain being listed on the NYSE or
NASDAQ. One such rule was, the board of directors would be more suggesting that 50%
was the prescribed board independence (Dah, Frye, Hurst, 2014).

2.6. Summary
In conclusion, we can say that most of the studies have been conducted on the New York
Stock Exchange, the results of these studies are inconclusive as well as many of these
studies contradict each other. Thus, the NASDAQ stock exchange has been chosen for
the purpose of this, since, while the market remains to be in the same market that is, the
US market, the use of a different stock exchange might enable this study to gain more
relevant results or results that can be used for further research.

24
 Table 2.1: Overview of Literature Review

Author Year Market Sample Size of Sample Methodology Results

Period
Bonnier and Bruner 1989 US 1969 -1983 70 companies & 87 event study Positive
Market- observations methodology and the
NYSE cross-sectional analysis
Warner, Watts and 1988 US 1963-1978 269 firms Event study Positive
Wruck Market- methodology & cross-
NYSE sectional analysis
Dedman and Lin 2002 United 1990 - 1995 251 firms event study Negative
kingdom- methodology, analysis
Market techniques-t-test and
FTSE Patel's standardized
residual statistics
Beatty and Zajac 1987 US 1979-1981 209 companies Event study Positive
Market- methodology, logit
NYSE regressions
Coughlan and 1985 US 1977 - 1980 276 companies Event study Negative
Schmidt Market- Methodology
CRSP tape
Chang, Dasgupta, 2010 US 1992-2002 381 companies Event study Negative

25
and Hilary Market- methodology and the
NYSE cross-sectional analysis
Denis and Denis 1995 US 1985-1988 721 observations Event study; t-test and Positive
Market- the Wilcoxon signed
Wall rank
Street
Journal
Index
Weisbach 1995 US 1971 - 1982 270 observations Event study, Positive
Markets- multivariate tests
CRSP
tapes
Kang and Shivdasani 1996 Japan 1985-1990 432 observations Event study Positive
methodology
Suchard, Singh, and 2001 Australia 1989-1995 59 observations Event study Negative
Barr methodology
Dahyaa and 2003 United 1988-1999 523 observations Event study Positive
McConnel Kingdom methodology

26
 Chapter 3: Methodology
3.1. Introduction
The previous chapter discusses the previous literature for the topic ‘stock price reaction to CEO
turnover’. This chapter will discuss the methodology used for the purpose of this study, it will
also explain the reasons for using a particular method. Collis and Hussey (2009) define research
methodology as “an approach that illustrates how theory, data collection, and analysis are carried
out.”

The chapter is divided into 5 sections, the first section discusses the research philosophy
approach used while conducting this research. The second section discusses the data collection
techniques that were used, followed by the sourcing and the method used to select data, the next
section describes the data analysis tool employed. The fifth section states the research ethics and
the final section provides a summary for the chapter.

3.2. Research Philosophy and paradigm

A paradigm can be defined as “A cluster of beliefs and dictates which for scientists in particular
disciple influence on what should be studied and how research must be done and how the results
of the research conducted could be interpreted.” (Bryman, 1988).Essentially the underlying
principles or the general idea which provides the bases for research methodology is referred to as
a philosophical paradigm (Collis & Hussey, 2009). This paradigm is based on a research
phenomenon known as the research onion. The research onion is a model that essentially entails
all the steps required to successfully fulfill a research project. The idea for the research
techniques is developed based on the philosophical paradigm. Epistemology and Ontology are
the philosophy underpinning this study. The ontology approach “makes you aware of the nature
of reality” that is, this approach aims to eliminate the difference between how reality is perceived
and what the reality actually is (O'Gorman, 2008). This study employs an objective ontology as
the research is conducted without bias. The epistemology approach is concerned with the manner
in which valid information is obtained, it is also concerned with whether the information is
provided after rigorous testing. The main problem associated with epistemology is deciding how
information must be acquired (Ryan, Scapens and Theobald, 2002). This paper utilizes a

27
positivist epistemology, this implies that the study focuses more on the facts and that a
hypothesis formed and tested (Paterson et al., 2016).

A quantitative approach is applied to conduct this research, Malhotra (2009) states that the
endeavors to quantify the data gathered and accordingly use statistical analysis to signify the
data. To conduct this study the method of quantitative analysis that will be used will be an OLS
regression and t-test which will be run on the daily stock prices of companies in the event of a
turnover. An event study methodology will be followed for the purpose of data analysis, this
method was initially developed by Fama, Fisher, Jensen, and Roll (1969).

3.3. Data Collection

There are two types of data that are, primary and secondary data. primary data is the data which
is collected by the researchers themselves, however the data that will be used for the purpose of
this study is Secondary, that is, the data is initially collected by other researchers and published
on various sources and does not need to be collected first hand by other researchers (Paterson et
al., 2016). The reasons for choosing secondary data for the dissertation is, firstly there is no other
method to measure stock market reaction and secondly, using secondary data is advantageous as
using this type of data is cost and time effective and since the time frame within which this
dissertation is conducted is small it is important that the time management is efficient
furthermore, higher quality data can be obtained if the data source is of good quality. Using
secondary data also offers the opportunity to do a cross-cultural analysis.

The sample applied for the purpose of the study included the companies listed on the NASDAQ
stock exchange which were ranked according to market capitalization, out of which a sample of
25 companies experiencing a CEO turnover in the years between 2015 and 2019 are chosen for
the purpose of this study. In these 25 companies, Texas instruments has experience 2 turnovers
within the time period as the CEOs were changed for this company twice in a span of a few
months, the reason released to the public simply stated “conduct violations”, as a result the
previous CEO was reappointed to his previous position (Nytimes.com, 2019).

Due to this, the total sample includes observations of 25 turnover events.

Each company will be having 9 event windows as it allows the study to draw more significant
results, the clean window will be (-210, -10). The event windows used are described in table 3.1.

28
 Table 3.1: Event-Windows

PRE-EVENT PRE-POST EVENT POST EVENT

(-10, -1) (-5, +5) (0, +10)

(-5, -1) (-3, +3) (0, +5)

(-3, -1) (-1, +1) (0, +3)

3.4. Data Analysis

Data analyses essentially refer to the management, analysis and the interpretation of data. The
statistical techniques being used to the data collected in order to conduct the study determine the
data analysis technique. There are two types of data analysis techniques, these are, descriptive
and inferential (Bryman and Bell, 2015). Descriptive statistics provide a brief description of the
data (eg: a measure of central tendency). Inferential statistics, on the other hand, requires
conducting various tests to analyse the data since the study requires measuring the impact of an
event using statistical models. Statistical models such as regression and t-test come under the
branch of inferential statistics (Collis & Hussey, 2009). The type of analysis being used is the
Inferential statistic.

As mentioned above the method used to analyze this data is event study, the purpose of this
study is determining the impact certain actions or some significant events have on the stock
prices of companies, this method was initially developed Fama, Fisher, Jensen, and Roll in 1969.
The definition of event study is, “process by which common stock prices adjust to the
information (if any) implicit in a stock split” thus the aim of the study would be determining if an
event has any significant impact on the share prices of a company if the event period is spilt in
groups, thus there are various different event windows used while conducting an event study, in
order to obtain significant results.

Ball and Brown (1968) very early on attempted to modify the theory developed by developed
Fama, Fisher, Jensen, and Roll in 1969. The research undertaken by Ball and Brown attempted to
establish a relationship between the unexpected earning and unexpected returns in US firms. The
research period was from 1946 until 1966 that is, twenty years. The results found by them were

29
significant therefore implying that share prices of a company do not just reflect the returns
obtained by the company but also incorporate the earnings that are, the financial statements of
the company. the study also found the share prices to remain volatile as that would depend on
whether the inflation presented in the financial statements is good or bad.

Post Ball and Brown also there have been many adaptations to the event study methodology, the
use of event windows to obtain the cumulative average returns is one such example (Binder,
1998). The reason behind adopting the event study for conducting this study is, it is a commonly
used according to previous literature as it allows the researcher to measure the impact of an event
such as a CEO turnover.

The event study methodology has certain assumption though, the first one is that it presumes an
efficient market hypothesis, which assumes that all accessible and existing information is
reflected in the asset prices that is it implies that if the market is efficient the stock price reaction
to an event will be an immediate response (Corrado, 2010).

The hypothesis that this study will be using in order to determine the impact of CEO turnover on
share prices are:

Table 3.2:Hypotheses to be tested

Hypothesis 1: Assessment of Cumulative Hypothesis 2: Assessment of Cumulative

Abnormal Returns Values Average Abnormal Returns Values

H0: CAR = 0 H0: CAAR = 0

H1: CAR ≠ 0 H1: CAAR ≠ 0

The event study will test the impact CEO turnover has on the share prices. In an event study, the
stock prices are examined around an event window, the event period could be created due to
multiple factors such as announcements made by the regulatory bodies or a change in
government rules, it could also be due to competitors announcements as well as the firm's
announcements itself. (Sorescu, Warren and Ertekin, 2017).

30
Furthermore, the market model will be used in order to calculate the E(Rit) or the expected
return. As is observed from the previous,

3.4.1. Market model

The expected return as per the market model can be calculated using the following
formula:
E(Rit) = αi + ßi Rmt + εi (Sherif, M., 2014)
Where,
ß- volatility of the stock
α- intercept
E(Rit) = Expected Return on stock at time t within the event window
Rmt = Return on the market at time t
εi = Regression error
3.4.2 Regression analysis
Based on the market model the return on the market portfolio and the responsiveness of
the security [measured by Beta (β)] the return on the security is determined. However,
there can sometimes be certain conditions that are exclusive to the firm which also
impacts the return on security. Using regression, the volatility of the stock that is, the β as
well as the α otherwise known as the intercept can be estimated as they form the
parameters of the market model. (Sitthipongpanich, 2000).
For the purpose of this study, the OLS regression will be used. OLS regression refers to
the Ordinary Least Square regression, it is also known as linear regression. Regression
analysis is defined as “the process of constructing a mathematical model or function that
can be used to predict one variable using another variable or variables.”( Cortinhas and
Black, 2012). Thus, the nature of data and the relationship between two different
variables can be found using the regression analysis (Wooldridge, 2012).
The following equation expresses a simple linear regression with a single independent
variable.
Y = a + βX

31
 The above equation expresses a linear relationship between the independent variable (X)
and the dependent variable (Y). The linear model has been chosen as it is unbiased and
the suggested regression analysis according to the literature.
The linear regression model works on the basis of certain assumptions, these are as
follows,
1. Independence of Residuals: the residuals in one observation is assumed to be
different from the observation of another variable that is, the error terms are
assumed to be independent.
2. Normality of residuals: the regression assumes that the error terms are normally
distributed.
3. Homoscedasticity: the assumption here is the residual variance remains constant if
this assumption is violated heteroskedasticity is said to take place and the results
are no longer significant.
4. Outliers: The assumption here is that the model is linear. Outliers also have to be
kept in mind while using the OLS regression as outliers can have a significant
impact on the regression results (Swift and Piff, 2010),

The next step is the calculation of Abnormal Returns. The abnormal losses or gains
on security can be calculated by deducting the actual return of security from its
expected return. This is calculated for each event window mentioned above.
The formula for calculating abnormal returns of security is as follows:
AR = Rit - E(Rit)
Where,
AR is the abnormal return
Rit is the return on the event day
E(Rit) is the return that was expected had the event not occurred.
3.4.3. Calculation of CAR and CAAR
The abnormal returns obtained will have to be tested across event windows as seen in
table 3.1., to determine if it is statistically significant. This will be done using the CAR
and CAAR models

32
 Thus, after the abnormal returns have been calculated, the next step is the calculation of
the cumulative abnormal returns, this is calculated by summing up all the abnormal
returns obtained from the security in different points of time.

−t
CAR = ∑ AR
t

The hypothesis formed can then be tested during the event window using the t-stat,
statistical model. The formula for calculating t-stat is as follows:

CAR
t-stat =
σ∗√ n
The null hypothesis will be rejected if the t-stat value is lower than 1.65; amounts higher
than 1.65 are statistically significant at the 10% significance level, while a value of 1.96
or higher is significant at 5% significance level and lastly, values of 2.5 or higher are
statistically significant at 1% significance level.

CAR calculation is done to determine the impact of each company’s turnover on its stock
prices while the CAAR value is needed to determine the significance of the entire event
study.
Thus, after CAR has been calculated, the CAAR value needs to be calculated
After CAR has been calculated the AAR has to be found, the AAR is the sum of all the
abnormal returns. The formula for AARt is as follows:
N
1
AARt =
N
∑ ARt
t=1

CAAR is the cumulative average abnormal return, thus it is found by summing up the
average abnormal returns.
N
1
CAAR = ∑ ∑ ARt
N t =1
3.5. Data analysis tools
The event study was conducted using Microsoft Excel software for the statistical analysis of
abnormal returns.

33
3.6. Research Ethics
This study employs only secondary data, that is it has been obtained externally from reliable
sources such as ThompsonOne and Yahoo finance, therefore no ethical concerns are raised
regarding this study, as all the research done has been in compliance with the rules and the
regulations provided by the university such as honestly reporting any procedures involved in
collecting data, important information, and any results that may lead to any altercations in the
outcome of the research, Acting professionally and analyzing all the data collected
responsibly and objectively, all the while maintaining unbiased attitude towards any person
or situation. According to wherever data has been collected. Acknowledgment has been
provided wherever necessary and to whomsoever has made a significant contribution towards
the research. Ensured that all the data collected, the analysis made, and conclusions reached
have been kept securely.
Furthermore, this topic has been approved by the Ethical Board.
3.7. Limitations of methodology
The limitations in conducting this study are; lack of familiarity with the data as the data
collected is secondary in nature, despite using reputed databases there is control over the
quality of the data. It might also be difficult to understand complex issues through
quantitative data as it might not be elaborate enough to do so, thus restricting the research
(Bryman and Bell, 2015).
3.8. Summary
In conclusion, we can say that this study employs an objective ontology and a positivist
epistemology. The study is quantitative in nature. the data sources being uses are
ThompsonONE and Yahoo Finance. The study uses inferential statistics as the statistical
technique for data analysis, under this the event study methodology is utilized to determine
the impact of CEO turnovers on stock prices.

34
 Chapter 4: Analysis and Findings
4.1. Introduction
Chapter 3 discussed the research methods used to conduct this research on CEO turnover.
The results of the study conducted based on the previously discussed analysis technique
i.e. the event study will be discussed in this chapter.
This chapter will also provide an analysis of the results, based upon which the previously
stated hypotheses will wither be accepted or rejected.
4.2. Results of Event Study
Table 4.1 displays the CAR and the t-statistic values for the pre-event windows i.e, the
event window preceding the actual event.
1
4.2.1 Pre-Event Windows.
Table 4. 3:

PRE-EVENT WINDOWS
(-10, -1) (-5, -1) (-3, -1)
COMPANIES CAR t-stat CAR t-stat CAR t-stat
CISCO 0.001 0.004 -0.001 -0.036 0.005 0.209
GILEAD SCIENCES 0.029 0.57 0.023 0.657 0.011 0.403
BOOKING HOLDINGS 0.033 0.646 0.015 0.431 0.021 0.772
INTUIT -0.013 -0.259 -0.036 -1.028 0.002 0.082
BIOGEN -0.026 -0.393 -0.011 -0.234 -0.03 -0.826
CELGEN 0.004 0.052 -0.05 -1.016 -0.042 -1.107
CSX 0.018 0.403 0.034 1.072 -0.029 -1.197
ILLUMINA -0.038 -0.383 -0.006 -0.083 -0.027 -0.506
COGNIZANT -0.037 -1.147 -0.007 -0.317 -0.019 -1.086
AUTODESK 0.143 2.44** 0.032 0.784 0.032 0.995
ALEXICON 0.05 0.596 0.011 0.188 -0.007 -0.152
DOLLAR TREE -0.045 -0.908 -0.004 -0.118 0.007 0.261
CINTAS 0.014 0.375 0.015 0.551 0.007 0.362
FASTENAL -0.009 -0.243 0.009 0.335 0.004 0.207
EXPEDIA 0.027 0.715 0.03 1.105 0.037 1.768*
CITRIX 0.042 0.903 0.007 0.217 -0.004 -0.163
CTRIP 0.039 0.623 0.029 0.661 -0.043 -1.255
PEPSI -0.021 -0.578 -0.018 -0.705 -0.028 -1.409
1
Significance at 10% is denoted with *

Significance at 5% is denoted with **

Significance at 1% is denoted with ***

35
TEXAS INSTRUMENTS
1 -0.014 -0.297 -0.002 -0.052 -0.008 -0.291
TEXAS INSTRUMENTS
2 0.016 0.348 -0.002 -0.06 -0.005 -0.195
21 CENTURY FOX
st
-0.026 -0.661 0.011 0.403 0.003 0.119
STARBUCKS -0.048 -1.547 -0.027 -1.246 -0.016 -0.934
EBAY -0.039 -0.961 -0.027 -0.938 -0.018 -0.804
T-MOBILE -0.019 -0.383 -0.011 -0.31 -0.006 -0.228
WALGREENS BOOTS -0.004 -0.099 -0.022 -0.759 -0.012 -0.558

As seen in the table above, the event study conducted found 12 companies to have
positive abnormal returns out of the 25 observations used to conduct the study within the
event window of (-10, -1) and out of the total observations Autodesk had the only
significant results at 5%. As the results of Autodesk are positively significant, this
implies that there is positive anticipation in the market in regards to the new CEO being
hired by Autodesk.

In the second pre-event window (-5, -1), the number of companies experiencing positive
Cumulative abnormal returns were 11 while the remaining 14 experienced negative
returns on their investment; within this window, none of the results were found to be
significant, thus there is no anticipation for the turnover in this time period.

The last pre-event window is (-3, -1), in this event window, 10 of the 25 observations is
positive while the remaining 15 are negative, thus less than 40% of the observations are
experiencing positive returns prior to the turnover event. Expedia has positive significant
results at the 10% significance level, this implies that the market has positive anticipation
of the new CEO

4.2.2. Pre-Post event Windows

The CAR and t-statistic values for the pre-post event windows are depicted in Table 4.2. As
mentioned previously, the pre-post event window includes days both prior to the event as
well as after the event.

In Table 4.2, the first pre-post event window comprises of 5 days prior to the event and 5
days post the event i.e (-5, +5) is the first event window. In this event window, 10 companies
show positive abnormal returns while the remaining 14 show negative abnormal returns. In

36
this window, Walgreens Boots experience negatively significant results at 10% significance
level; this implies the market is reacting negatively to the turnover in Walgreens.

Table 4.4

PRE-POST EVENT WINDOWS

(-5, +5) (-3, +3) (-1, +1)
COMPANIES CAR t-stat CAR t-stat CAR t-stat
CISCO -0.01 -0.238 0.003 0.09 -0.002 -0.079
GILEAD SCIENCES 0.013 0.244 0.026 0.608 -0.001 -0.054
BOOKING HOLDINGS -0.026 -0.497 -0.013 -0.295 -0.003 -0.096
INTUIT -0.076 -1.473 -0.02 -0.498 0.026 0.957
BIOGEN 0.022 0.313 -0.006 -0.113 -0.015 -0.414
CELGEN -0.032 -0.442 -0.048 -0.831 -0.025 -0.667
CSX 0.019 0.405 -0.022 -0.585 0.018 0.72
ILLUMINA -0.053 -0.516 -0.028 -0.342 -0.007 -0.139
COGNIZANT -0.018 -0.535 -0.044 -1.65* -0.02 -1.118
AUTODESK 0.023 0.37 0.003 0.052 0.004 0.131
ALEXICON -0.002 -0.024 -0.038 -0.542 0.007 0.162
DOLLAR TREE -0.014 -0.262 0.016 0.392 0.006 0.217
CINTAS 0.022 0.565 0.009 0.287 0.025 1.239
FASTENAL 0.047 1.143 0.037 1.142 0.028 1.315
EXPEDIA 0.042 1.046 0.027 0.842 -0.028 -1.351
CITRIX -0.016 -0.338 -0.016 -0.407 0.003 0.124
CTRIP 0.061 0.925 -0.038 -0.718 -0.04 -1.158
PEPSI -0.021 -0.553 -0.033 -1.069 -0.018 -0.91
TEXAS INSTRUMENTS
1 0.018 0.369 -0.001 -0.029 0.013 0.48
TEXAS INSTRUMENTS
2 -0.1 -0.212 -0.037 -0.949 -0.033 -1.276
21 CENTURY FOX
st
0.014 0.344 -0.003 -0.081 0.001 0.063
STARBUCKS -0.018 -0.564 -0.008 -0.301 -0.005 -0.276
EBAY -0.044 -1.046 -0.046 -1.374 -0.06 -2.728***
T-MOBILE -0.057 -1.11 -0.05 -1.224 -0.028 -1.042
- -
WALGREENS BOOTS -0.079 1.859* -0.062 1.831* -0.042 -1.912*

The second pre-post event window is (-3, +3), within this window only 7 companies
experience positive abnormal returns, the remaining 18 companies show negative
abnormal returns. Cognizant and Walgreens Boots are both negatively significant in this

37
 event window at a 10% significance level. The market is thus, negatively reacting to the
CEO turnover for both these companies.

The final pre-post event window considers only one day prior to the event and one-day
post the event i.e the event window is (-1, +1), during this period 10 companies
experience positive abnormal returns while 15 experience negative abnormal returns. In
this event window, 2 companies experience significant results; eBay and Walgreens
Boots are both negatively significant at 5% and 10% respectively. This implies that the
market is reacting negatively to the CEO turnover in eBay and Walgreens.

4.2.3. Post Event Windows

Table 4.3 depicts the CAR and t-statistic values of companies in the post-event periods i.e period
after the event has taken place.

Table 4.5

POST EVENT WINDOWS

(0, +10) (0, +5) (0, +3)
COMPANIES CAR t-stat CAR t-stat CAR t-stat
CISCO 0.001 0.027 -0.009 -0.288 -0.002 -0.062
GILEAD SCIENCES -0.056 -1.057 -0.01 -0.27 0.014 0.455
BOOKING HOLDINGS -0.041 -0.78 -0.042 -1.066 -0.034 -1.059
INTUIT -0.045 -0.875 -0.04 -1.055 -0.023 -0.729
BIOGEN 0.064 0.908 0.033 0.637 0.024 0.566
CELGEN 0.013 0.181 0.017 0.328 -0.006 -0.141
CSX -0.045 -0.963 -0.015 -0.43 0.007 0.263
ILLUMINA -0.048 -0.461 -0.047 -0.623 -0.001 -0.013
COGNIZANT -0.003 -0.098 -0.011 -0.436 -0.025 -1.22
AUTODESK 0.082 1.331 -0.01 -0.215 -0.029 -0.792
ALEXICON 0.001 0.011 -0.013 -0.204 -0.031 -0.586
DOLLAR TREE -0.023 -0.451 -0.01 -0.247 0.009 0.292
CINTAS 0.022 0.567 0.008 0.263 0.002 0.065
FASTENAL 0.091 2.236** 0.037 1.242 0.033 1.332

EXPEDIA 0.011 0.284 0.012 0.407 -0.01 -0.417

38
 CITRIX -0.016 -0.328 -0.024 0.665 -0.012 -0.398
CTRIP -0.075 -1.13 0.032 0.649 0.005 0.137
PEPSI -0.025 -0.639 -0.003 -0.106 -0.005 -0.194
TEXAS INSTRUMENTS
1 0.02 0.395 0.02 0.547 0.006 0.214
TEXAS INSTRUMENTS
2 -0.003 -0.06 -0.008 -0.232 -0.032 -1.086
21st CENTURY FOX -0.033 -0.78 0.003 0.098 -0.005 -0.211
STARBUCKS 0.003 0.082 0.009 0.375 0.008 0.41
EBAY -0.019 -0.452 -0.018 -0.559 -0.029 -1.121
T-MOBILE -0.044 -0.866 -0.046 -1.22 -0.044 -1.422
WALGREENS BOOTS -0.047 -1.112 -0.057 -1.824* -0.049 -1.938*

The first event window in the post-event window is (0, +10), within this window, from the 25
observations used to conduct this study, 10 companies have positive abnormal returns while the
remaining 15 have negative abnormal returns. The t-statistic finds only Fastenal to have a
significant result. Fastenal has positively significant results at the 10% significance level, this
implies that the market is reacting positively to the change in CEO.

The second post-event window is (0, +5), from the 25 observations, 9 companies have positive
abnormal returns while 16 companies have negative abnormal returns. In this event window,
Walgreens Boots has negatively statistically significant results at 10% significance. This implies
that the market is reacting negatively to the CEO turnover of Walgreens Boots.

The last post-event period is (0, +3), here as well 9 companies have positive abnormal returns
while 16 companies have negative abnormal returns. In this event window, only Walgreens has
significant results at 10% significance level, since the t-statistic value is positive the market is
reacting positively to the turnover.

39
 4.2.4. Average Abnormal returns

Table 4.6

Average
 Event Abnormal
days Returns
-10 0.005
-9 -0.001
-8 -0.003
-7 -0.003
-6 0.005
-5 0.001
-4 0.005
-3 -0.004
-2 -0.002
-1 -0.001
0 -0.005
1 -0.002
2 -0.005
3 0.003
4 0.000
5 0.001
6 -0.004
7 -0.002
8 0.001
9 0.002
10 0.002

Table 4.4 is portraying the average abnormal returns (AARs) for each event day in the analysis
period used. The fluctuation of the AAR is depicted in the graph below.

40
 Average Abnormal Returns
0.006

0.004

0.002

0.000
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

-0.002

-0.004

-0.006

4.2.5. Cumulative Average Abnormal Returns Values and Significance

Table 4.5 is describing the CAAR and t-statistic values for all the different event windows.

Table 4.7

Pre-Event
Window (-10, -1) (-5, -1) (-3, -1)
CAAR 0.003 -0.0002 -0.007
t-stat 0.286 -0.029 -1.16
       
       
Pre-Post Event (-5, +5) (-3, +3) (-1, +1)
CAAR -0.008 -0.016 -0.008
t-stat -0.719 -1.799* -1.376
       
   
Post-Event (0, +10) (0, +5) (0, +3)
CAAR -0.009 -0.008 -0.009
t-stat -0.787 -0.948 -1.375
       

41
In the pre-event window (-10, -1) a positive CAAR and t-statistic are observed, while in the
remaining two windows i.e. (-5, -1), (-3, -1) the CAAR value, as well as the t-statistic, have
negative values. As none of the event windows have significant results, we can say that the
market is anticipating positive returns 10 days prior to the event day while they are negative 5
and 3 days prior to the event.

For the pre and post-event window it is observed from the above table that all the windows
depict negative abnormal returns and the results of the study for 2 event windows i.e
(-5,+5) and (+1,-1) are insignificant while the event window of (-3,+3) is significant at 10%, the
significance of the window illustrates that the market is reacting positively to the change in CEO.
The results observed for the post-event period all have negative abnormal returns and are not
statistically significant.

4.3. Discussion of Findings

The tables illustrated above depict, the study conducted on the whole has insignificant
results. Most companies have negatively insignificant results and thus the market is not
looking forward to the change in CEO.

In the first pre-event window Autodesk is highly significant, the reason behind this could be
that the investors were not happy with the behavior of the former CEO Carl Bass as the
announcement that he would be stepping down as CEO was made after facing backlash due
to comments made by him on President Trump. The positive reaction could also be due the
appointment of Andrew Anagnost as he was appointed internally, and as seen from the
previous literature, the market reacts positively to internal appointments as this displays
strong human capital in the company, however, it is also entirely possible that the positive
market reaction is due to some other event has taken place in the same event period as none
of the other event windows have significant results. Expedia also has positively significant
results in the last pre-event window, here as well the CEO was appointed internally.

In the pre-post event window as well as the post-event windows, Walgreens Boots
consistently has negatively significant results, this could be due to the allegations made
against the former CEO and CFO of Walgreens, according to the SEC they were negligent in
disclosing the increase in risk upon their merger with Alliance Boots, the SEC also stated that
the executives at Walgreens consistently mislead the investors of the company.

42
eBay also has significantly negative abnormal returns in the last pre and post-event window.
The reason behind the negative abnormal returns, in this case, could be due to the corporate
spin of PayPal. Cognizant also has a similar finding in the second pre-event window, the
cause of the negative abnormal results could be the fact that Brian Humphries was the first
CEO Cognizant did not hire internally, however as previously stated the market could be
reacting to a simultaneous event.

In the post-event window, Fastenal has highly significant positive abnormal returns, in the
first post-event window, the cause of this might be the return of Leland Hein to the CEO
position.

The results of this study coincide with those of Dedman and Lin (2002), this study was
conducted for firms located in the United Kingdom firms and also found insignificant results,
Dedman and Lin (2002) stated that the market does not react to the turnover announcement
as it is usually released alongside the replacement announcement and this would conceal the
impact of the bad news that is, the current CEO stepping down.

Therefore, turnovers depicting significant abnormal returns, whether positive or negative,

will reject the null hypothesis i.e. H0: CAR = 0. will be rejected, thus we can say that the
market reacts to the change in CEO. In regards to the companies for which the turnovers do
not depict significant abnormal returns, the null hypothesis that is, H0: CAR = 0. will be
accepted. Since the CAR values of very few companies are significant, the study has
concluded with insignificant results for CEO turnover on the NASDAQ stock exchange.

Similarly, the second pre-post event window has significant cumulative average abnormal
returns and thus, in this case the null hypothesis that is, H0: CAAR = 0 will be rejected for
this event window, however, the remaining 8 event windows have insignificant results and
thus, for these event windows, the null hypothesis will be accepted. Since more results have
insignificant results, overall the study conducted accepts the null hypothesis. Therefore,
according to the study conducted, the market is efficient and CEO turnover does not have an
impact on the market prices of companies.

43
 4.4. Conclusion
This chapter discusses and analyses the results found from the event study conducted in order to
determine the market reaction to CEO turnovers, it also tries to justify the reasons for the market
reaction, the data found has also been presented in this chapter.

The chart presented displays the trend in Average abnormal returns, during the event window, 10
days prior to the and 10 days after the event has already taken place.

44
 Chapter 5: Conclusion
5.1. Introduction
This chapter will be summarizing the research questions, the aims, and objectives of the study as
well as the findings from the study conducted in the first section of this chapter. The next section
of the chapter talks about the limitations of the study conducted and the topics for further
research will also be discussed on the basis of which, researchers can carry on understanding the
complicated topic that is market reaction to CEO turnover.

The methodology used for the purpose of the study as well as the findings and analysis will also
be summarized in this chapter. Finally, the chapter also provides a self-reflection based on this
work, this has been attached at the end of this chapter.

5.2. Dissertation Overview and Findings

The research question for is study is: Does CEO turnover have an impact on the share prices of
companies? In order to answer the question, based on relevant literature, the event study
methodology was employed to analyse the data. the event study mythology determines if the
investors are gaining or losing money due to the occurrence of a particular “event”; the abnormal
returns are calculated by deducting the actual returns from the expected returns. In order to
complete the research, the US market was chosen, however since most of the research is based
on the NYSE, the NASDAQ stock exchange was used in order to provide a more wholesome
picture on the US markets. The time period used for the purpose of this study was 5 years
between 2014-2019.

The study overall was insignificant since most of the results found the study to be insignificant,
even though one of the event windows showed significant results; insignificant results occur
when the market is efficient; an efficient market occurs when the market prices reflect all the
publicly available information at all time. The implication of the result is that the market has
already reacted to the information in the market and thus the results found are insignificant. Most
of the CAAR values are negative and insignificant however, the pre-event window of (-10, -1)
found the CAAR values to be positive.

The only significant CAAR value found in the study is the pre-post event window of (-3, +3),
this is despite some companies having significantly high abnormal returns, the graph for average

45
abnormal returns also depicts higher abnormal returns in the pre-event period as opposed to the
post-event period. In respect the company CAR values, companies such as Walgreens Boots
illustrate mostly negatively significant results due to the scandal caused by the CEO and CFO
during the merger with Alliance Boots, the company executives had misinformed the investors
about the financial risks associated with the merger and the CEO was forced to step down upon
conclusion of the merger. In 2018 it was also announced that Walgreens would be obligated to
make a payment of $34.5 million to the SEC. Similar results were found by eBay due to the
corporate spinoff of PayPal.

Texas Instruments changed its CEO twice in a matter of months, stating the issue with the new
CEO to conduct issues, they reinstated the former CEO to this position, as a result, it is observed
from the tables in chapter 4, the first turnover had only positive and insignificant returns in the
post period first turnover and only negatively insignificant results during the second turnover; for
the pre-post and the pre-period also most of the returns were negative in the second turnover. the
CAR values for Expedia and Fastenal were also significant during the last event windows.

This study thus concludes that change in CEO does not result in significant changes in market
prices, the null hypothesis is, therefore, being rejected.

5.3 Limitations of study and Future Research

The most evident limitation of this study is the sample size, as it is difficult to predict the market
based on such a small sample as a bigger sample would be more successful in capturing the
reaction of the market.

Secondly, this study is run considering the event day to be the appointment date, thus, it might be
possible to get significant results if the event date was considered to be the announcement day.

Lastly, in theory, since the CEO plays an integral role in any organization it is assumed that such
a change would have a significant impact on the market, however since the analysis of this study
does not agree with this, the method used for analyzing the data could be altered. This study uses
the market model to determine the abnormal returns as suggested by the previous literature,
however there are various different models that could be used to conduct the study such as the
Fama and French three-factor model or the Capital Asset Pricing Model, the use of another
model could help the researcher obtain more significant results.

46
5.4. Self-Reflection
This section will be reflecting on the work done while conducting this study. Firstly, the
objectives mentioned in the first chapter have all been achieved. Secondly, undertaking this
research has enabled me to enhance my research skills, it has also enabled me to enhance my
skills on various software’s while stepping into a work environment, this is an excellent stepping
stone. Doing this research has also enabled me to improve my time management skills, it has
allowed me to attempt to make a contribution to the literature this topic

47
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