Quitters
February 17, 2022·3 comments·In Brief
Executive departures carry an almost mythic weight in markets. The stories are unforgettable: a geologist falls from a helicopter at Bre-X, a CEO calls an analyst an asshole before resigning at Enron, a CFO departs in the final days before Lehman collapses. The pattern feels obvious. But when you look at what actually happens to stock prices after these announcements, something doesn't add up.
• The announcement reaction is real and brutal. Markets punish executive departures on the day the news breaks, especially when multiple departures happen in quick succession. The fear is visceral and immediate. But that intensity masks an uncomfortable question about what happens next.
• The predictive power stops almost immediately. Research consistently shows that the negative stock reaction concentrates on announcement day and a few days after. What researchers haven't been able to demonstrate is whether departures actually signal bad future performance or if markets simply overshoot on the news itself.
• Volatility increases, but timing matters. CEO changes trigger higher stock volatility, yet careful analysis suggests the volatility spike may occur before the announcement as rumors circulate. The causal direction is hazier than it appears.
• The market treats departures differently depending on structure. Forced exits are worse than voluntary ones. Multiple departures in succession are worse than single departures. But none of this tells you which companies will actually underperform beyond the initial shock.
• We're relying on pattern matching instead of prediction. The most memorable executive departures preceded disasters, which creates a powerful heuristic. The real question is how many departures preceded nothing at all, and whether the market's initial fear proved justified by what came next.
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Comments
Regarding the chart in the appendix section titled The Impact of CEO Turnover on Equity Volatility, if you look carefully at the chart x-axis you’ll see that T-0, the event date, is in the middle (not the extreme left as may be assumed), as such, the chart in fact suggests that company volatility increases on average in the run-up to the CEO change, peaks around the time of the change, and then gradually decreases over the following two years, at which point it has fully reverted to the same level as the control population. I would suggest that the chart does not imply that “CEO changes increase stock volatility” - what the chart shows is that CEO changes happen when the stock is already more volatile than is typical, and this excess volatility persists for 24 months on average.
(I would also be suspicious of the odd looking artefact in the chart for the control population, showing a drop in vol at that +26 month point)
Agree on all points, Tom.
Yes great point thanks Tom. Probably efficient market with some news leaking out early (Erin Callan rumors were swirling well before she got fired) … and information accruing to insiders or connected people as well.
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