Stock Price Reactions of Small Public Firms to the Loss of the CEO (1999)

When a executive in a business dies, the business usually faces a host of challenges. The more obvious issues would include orderly succession, potential loss of continuity, disruption of relationships with customers, suppliers, or financial institutions, and loss of investor confidence. The perceived loss of investor confidence has been the subject of a number of academic studies. Researchers have attempted to separate the effect of the loss of a executive on publicly traded companies by isolating the impact on the common stock price. The rationale for this approach is based upon efficient market theory, which presumes that the price of any security incorporates all available information, whether public or private, into the market price at every point in time. Further, it implicitly assumes that new information is instantaneously reflected by the market price of the security. Therefore, any net change in the stock price measured before and after a significant event is thought to indicate the market perception of the event. If the identified event is the death of a executive of a corporation, it follows that the market response should be largely a statement of confidence, or lack thereof, in the ability of the firm to find a suitable replacement in a timely fashion. Three lines of thinking have emerged regarding these succession issues (Reinganum 1985). First, administrative change can be thought to improve performance, leading to the expectation of a positive market effect. Second, the thought that these changes might adversely affect the organization and precipitate a slide in performance leads some to expect a negative market effect. Third, these changes might be considered unimportant and thus no change will be expected. This final option gives recognition to the possibility that leadership has very little bearing on organizational performance. Previous research by Worrell and Davidson (1987) supports the first alternative mentioned by Reinganum above. In a study of large corporations, Worrell and Davidson found a positive market reaction to internal succession announcements over the seventeen-year period 1966-82. No abnormal effects were found relating to external succession. However, the work of Beatty and Zajac (1987) supports the second alternative mentioned by Reinganum, where a reduction in the value of the firm was found following announcements of 209 CEO changes at large corporations during 1979 and 1980. The results remained intact for both insider and outsider succession. Fiegener et al. (1996) found differences in the manner in which succession planning was handled in small family versus non-family firms. Their study included a survey of 357 small firms with 500 or fewer employees. They found family firms taking a more direct approach to succession planning whereas non-family firms tended to outsource their succession preparation. They also determined that most small companies depended upon some type of succession planning activity, although what they did varied among firms. The evidence cited is somewhat mixed regarding the usage of succession planning and the related issue of management depth. However, if a executive dies, the market reaction which follows is very likely to be highly influenced by the market's perception of the adequacy of management depth. This is the focus of this research. Historical Perspective Most of the research to date has centered on the effects of the loss of a senior executive on large companies that trade on the New York Stock Exchange and the American Stock Exchange. A key person was defined as someone with the title of President, Chairman, and/or Chief Executive Officer. In reviewing the pertinent literature, some common conclusions emerged but some differences of opinion were also noteworthy. In a study covering 1967-1981, Worrell et al. (1986) examined 127 NYSE and AMEX companies in which a executive had died. …