Brent Donnelly is a senior risk-taker and FX market maker, and has been trading foreign exchange since 1995. His latest book, Alpha Trader, was published last summer to great acclaim (by me, among others!) and can be found at your favorite bookseller. I think it’s an outstanding read, and not just for professional traders.

You can contact Brent at his new gig at [email protected]spectramarkets.com and on Twitter at @donnelly_brent.

As with all of our guest contributors, Brent’s post may not represent the views of Epsilon Theory or Second Foundation Partners, and should not be construed as advice to purchase or sell any security.

[Ed. note – in the spirit of the question we are always asking ourselves at Epsilon Theory – WHY AM I READING THIS NOW? – Brent asks a slightly different question about announcements of senior management departures: DOES WHAT I’M READING NOW MATTER? As much as we think it should matter, it’s hard to find any evidence that it does!]

Quitters, Inc. by Stephen King

Anyone who has been in finance for more than a few years most likely has personal experience or strong memories of executive departures … Theranos, Enron, or others. There is anecdotal logic to a fear trade when a company executive (or two, or three!) resigns out of nowhere. Of course, there are counterexamples too, and it’s not always a red flag. When Tesla CFO Jason Wheeler left in February 2017, that was not a sell signal!

Fun memory: When I worked at Citi, when someone resigned, the entire trading floor would clap them off to celebrate their good work. One hilarious guy I worked with (TJ) would always yell “Quitter!” over the applause. LOL. The best of these clap-offs (and TJ didn’t yell “quitter” for this one) was when the maintenance / janitor man for our floor, who had worked there for 30 years, retired. People lost their minds clapping for him as he walked out. He was clearly touched. I may or may not have cried a little tiny bit.

Executive departures resonate strongly with me as a red flag indicator because 1) they are logically huge red flags and 2) I have three flashbulb memories of key executive departures that signaled imminent disaster.

1. March 1996, Michael de Guzman at Bre-X “falls out of a helicopter”

I have never felt richer than I felt on the day I got my first performance bonus. I was already making what felt like incomprehensibly insane money as I had just scraped through four years of university on part-time and summer jobs, Kraft Dinner, $100 monthly checks from my mom and dad and two slowly (then suddenly) ballooning credit cards. Then plunk: my first bonus was $20,000. I had just won the lottery! There was only one thing to do with all that money: go all-in on the most exciting investment story I had ever seen!

I put it all in Bre-X, a speculative gold mining company that had taken the world by storm. The Calgary company was saying it had found the largest gold mine in the world; the stock was en fuego. It was the biggest story in Canadian financial markets at the time and one of the biggest ever.

Then, on March 19, 1997, a very troubling headline. “Bre-X geologist Michael de Guzman falls to his death from a helicopter in Borneo”. Certainly a non-standard executive departure. And a sad and memorable one. It turned out he actually jumped on purpose. The whole Bre-X story unraveled quickly after. It was all a fraud.

And…. It’s gone.

Full story here: https://en.wikipedia.org/wiki/Bre-X

2. August 2001, Jeff Skilling at Enron resigns

Background from wiki: On March 28, 2001, PBS’s Frontline interviewed Skilling, where he claimed for Enron “We are the good guys. We are on the side of angels.”

On April 17, 2001, Skilling made what became an infamous comment during a conference call with financial analysts. In response to fund manager Richard Grubman saying, “You know, you are the only financial institution that can’t produce a balance sheet or cash flow statement with their earnings”, Skilling replied: “Thank you very much, we appreciate that… asshole.”

Skilling unexpectedly resigned on August 14 of that year, citing personal reasons, and he soon sold large amounts of his shares in the corporation. Then-chairman Kenneth Lay, who previously served as CEO for 15 years, returned as CEO until the company filed for bankruptcy protection during December 2001. When brought in front of congressional committees, Skilling stated that he had “no knowledge” of the complicated scandal that would eventually result in Enron’s bankruptcy.

In 2006, he was convicted of federal felony charges relating to Enron’s collapse and eventually sentenced to 24 years in prison.

3. June 2008, Erin Callan at Lehman is fired

I was on paternity leave, walking through Central Park, pushing my 4-year-old son in the orange Bugaboo stroller, eight days after the birth of my second son. My Blackberry rang and I wanted to be a good Dad and not answer it, so I didn’t. Then it rang again. And again. It was a buddy of mine calling to tell me:

“Dude, Callan just resigned or got fired or something. It’s over.”

There was no single moment that signaled the end of Lehman but the bad earnings and CFO departure the week of June 9th were certainly close.

This story is amazing in hindsight:

NYT, June 17, 2008: At Lehman, Chief Exudes Confidence

I love anecdotal stuff in markets, but only when it’s supported by empirical evidence. That is why I did the work to confirm The Magazine Cover Indicator and that’s why I like to go deep in the numerical weeds of Excel almost every day. My question today is:

Do executive departure announcements predict poor equity performance going forward?

Common sense says “yes” but common sense is sometimes wrong. Articles such as this one from the WSJ are full of examples but lack empirical data. A quick one pager from cglytics looks at just six years S&P500 performance data. but seems logical. Their conclusion is that multiple departures are a red flag while a single departure is not. Makes sense.

Here are some highlights of the research that I found (with the four studies I thought were most relevant summarized below).

  • There is conclusive evidence that executive departures are, on average, bad for the stock on announcement day.
  • More than one departure in a short period is significantly worse than a single departure.
  • Negative effects on stock prices and company performance can persist for up to two years but very little research has gone into separating the announcement effect from the follow-through impact of executive departures.

Most studies simply support the more obvious conclusion that senior executive departures are unambiguously bearish, but only on the day of announcement.

If you know of any research that shows stock performance AFTER the announcement effect, please send them over. Thanks!


Do Independent Director Departures Predict Future Bad Events?

Fahlenbach, Low, and Stultz (2017)

My summary: They use a control group (random director deaths) to conclude that surprise director departures are viewed as, and are empirically, bad news for immediate and future equity performance. The methodology here looks solid.

Abstract: Following surprise independent director departures, affected firms have worse stock and operating performance, are more likely to restate earnings, face shareholder litigation, suffer from an extreme negative return event, and make worse mergers and acquisitions. The announcement returns to surprise director departures are negative, suggesting that the market infers bad news from surprise departures. We use exogenous variation in independent director departures triggered by director deaths to test whether surprise independent director departures cause these negative outcomes or whether an anticipation of negative outcomes is responsible for the surprise director departure. Our evidence is more consistent with the latter.

The Impact of CEO Turnover on Equity Volatility

Clayton, Hartzell, Rosenberg (2003)

Abstract: A change in executive leadership is a significant event in the life of a firm.  This study investigates an important consequence of a CEO turnover: a change in equity volatility. We develop three hypotheses about how changes in CEO might affect stock price volatility and test these hypotheses using a sample of 872 CEO turnovers over the 1979-95 period. We find that volatility increases following a CEO turnover, even when the CEO leaves voluntarily and is replaced by someone from inside the firm.  Forced turnovers increase volatility more than voluntary turnovers – a finding consistent with the view that forced departures imply a higher probability of large strategy changes.

My summary: CEO changes increase stock volatility. Higher volatility is generally associated with lower returns and lower Sharpe ratios, but the paper does not cover returns, just vol. Here is the money chart:

Shareholder Wealth Effects of CEO Departures: Evidence from the UK

Dedman and Lin (2001)

My summary: Negative stock returns on announcement day and company return on assets remains below industry benchmark for two more years after a CEO departure.

Abstract: The market reacts negatively to announcements of top executive departures, especially when the CEO is dismissed or leaves to take up another job. Share price reactions to the disclosure of top executive departure are significantly affected by the financial risk of the firm and whether the board announces a replacement CEO.

CFO Gaps: Determinants and Impact on the Corporate Information Environment

Chen, Li, and Lin (2022)

My summary: Firms with CFO gaps tend to have larger earnings surprises and more restatement of earnings. The paper makes no conclusions on equity performance per se but does show that bid-ask for companies with CFO departures is 2.5% wider than for companies with a CFO. The paper is more like “companies without CFOs are more volatile” than “CFO departures are bad” but the logic overlaps somewhat.

Abstract: A CFO gap arises when the CFO position is left vacant for a period between the departure of the old CFO and the appointment of a new CFO. CFO gaps are more likely for firms that face more labor market search frictions and with financial reporting and performance issues and are less likely for firms with succession plans and with greater growth opportunities. CFO gaps are associated with significantly negative changes in firms’ voluntary disclosure frequency and analysts’ forecast quality.

To learn more about Epsilon Theory and be notified when we release new content sign up here. You’ll receive an email every week and your information will never be shared with anyone else.


  1. Avatar for tdoris tdoris says:

    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)

  2. Avatar for bhunt bhunt says:

    Agree on all points, Tom.

  3. 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.

Continue the discussion at the Epsilon Theory Forum


The Latest From Epsilon Theory


This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.

Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.