CEO Departures and Market Uncertainty

Abstract

This study investigates the effect on stock return volatility of a significant event in the life of a firm, a change in its CEO. Citing weaknesses in the prior literature, we bring a new approach to re-examine the issue. First, we use a relatively unbiased classification system using both company announcements and media reports. Second, we use short-term stock return volatility as a more accurate estimator to isolate the effect of a single disclosure. We find strong evidence that the level of stock return volatility increases following announcements of CEO departures, and that the increase is significantly higher following announcements of forced departures compared to voluntary departures. The results are consistent with signalling effect theory in that forced dismissals convey previously unknown information to the market. Signed cumulative abnormal returns are also more negative for a forced CEO departure.