Research background
Discuss about the Finance for Share Price Reaction on CEO Departure.
Out of many external and internal factors which affect the share price and policies of the organisation, departure of CEO from the company and its impact is also an internal factor. In the following study the share price reaction on CEO’s departure, comparison of share price reaction of NASDAQ and NYSE listed company, various event studies on Samsung, Volkswagen and medical leave taken by Steve Jobs is considered. This will show the shareholder’s behaviour towards the company after the departure of the CEO of the company.
The proposed study will study regarding the share price reaction on CEO’s departure on the company. A distinction was made among different types of turnover of CEO’s: voluntary departure, forced resignation and age-related agreements. The forced resignation of CEO is favourably hailed by the market with a very positive abnormal return of 0.5%. Whereas, price reaction are not caused by voluntary resignation, and a slight negative price reaction is triggered by age-related turnover. The top management classification is based on successor’s background.
- What is the impact of share price reaction on CEO’s departure on company?
- How does the comparison of share price reaction of NASDAQ and NYSE listed company will impact the share price?
- What are the recent cases regarding share price reaction?
The key aim of the proposed analyses is to discover the impact on share price reaction due to CEOs departure on the company and its investors. In context of this, the analyses will evaluate the different roles and aspects that will be faced by the investors and their lookout of investing in the company even after the CEO’s departure. Following are the objectives of this research:
- To analyse the positive and negative impact of CEO departing from the company.
- To help the investors to invest in the company.
The share price reaction due to the departure of CEO will help in gaining the knowledge regarding the positive and negative impact on the organisation. This will help the stakeholders to make a clear view regarding the company. This research will also justify the stability of the company regarding its investment policies and procedures.
- H0: There is no significant relationship between CEO departure and share price of the company.
- H1: There is significant relationship between CEO departure and share price of the company.
In the words of Doddy Setiawan, (2008) Chief Executive Officer (CEO) is a person who helps in defining the firm’s strategy to compete with other firms in the market. The turnover of CEO will impact on the strategy of the company. The investment decisions will be changed by incoming of the new CEO, which changes the company’s structure. According to Clayton, Hartzell and Rosenberg, 2005, the CEO turnover is also seen as the changes in company’s management, i.e. the company want to apply new rules and policies on the companies after coming of the new CEO. As per Setiawan, 2008, the change in management style is expected to improve the value and performance of the company. Few of journalists found the turnover of CEO as a positive market reaction in US. On the other hand, few of the journalists found it negative. The UK researchers also found mixed results. These mixed reactions were not only seen in UK and US but also in Australia, Asia and Japan. This means market perceives succession of CEO as an improvement of firm’s performance, and they react positively.
Research Questions
The differences in announcement of information may be the result of different, market reaction of the CEO turnover: (1) process of CEO change: non-routine and routine; and (2) announcement of CEO turnover affected by context of organisation and content of organisation succession. Researchers found that announcement of turnover of CEO are increasing the shareholders’ value especially when it is forced turnover and when the successor is an outsider. On the contrary, Lin and Dedman (2002) found that the market had a negative reaction on the announcement of turnover in which involuntary departure was paid more attention or any other executive leaving the job. The mixed analyses studied before depicted that succession of CEO can put a significant impact on wealth of the shareholder. The study mainly focuses on assessment of effects of price turnover of CEO and announcements of selection. The last date of duty of CEO is the departing day while the selection of CEO is the first date of duty of CEO succeeding. All the listed companies that have announce the CEO selection and turnover from 2008 to 2010 were included in the sample (Ishak and Latif, 2012).
Few organisations outperformed by others. An explanation regarding this is in the case of attribution of number of factors including alignment of strategy to the structure of firm. The most senior general manager is considered to be the Chief Executive Officer of the organisation in the simplest form, the total enterprise’s management is the general management, and could be defined conducting of efficient, informed, purposeful and planned activity. This is supported by Menon and Swartz (1985), who stated that change in top management of the organisation can be concluded by a number of investigators and it is a typical determinant of the organisation to adapt the ability of the behaviour (University of Pretoria, 2007).
The combination of unique market model of the NYSE, unparalleled media, unmatched network of world’s greatest companies and platform visibility and investors relation regarding award winning offerings has promoted organizations as diverse and dynamic as Qiagen, WPP, Spirit Airlines, Blackberry, Norwegian Cruise Lines, Oracle, Donnelly, R.R, and so on to re-evaluate the exchange choice and move to NYSE. Since 2000, Nasdaq has transferred $1.3 trillion to the NYSE in equity market cap alone (NYSE, 2018). The research covers two giants of the stock market worldwide i.e. NYSE and NASDAQ. These stock exchanges are selected as a part of different geographic and socio-economic backgrounds. Firstly an appropriate methodology is chosen and then key criteria are identified. The main part is to analyse the key performance indicators, wherein the comparison is made on the exchanges in certain quantitative and qualitative parameters from January 2010 to December 2014. The NYSE and NASDAQ are ranked on 1st and 2nd position with market capitalization of $11.299 billion and $8.739 billion respectively in the largest stock exchange index by world domestic market capitalization (World Federation Exchanges, 2016). Bank of New York was the first listed company in NYSE. In 2014, the total share trade volume of NYSE, including the negotiated deals around $15000 billion dollar.
Research Aim and Objective
Kwon Oh-hyun, the CEO and Vice Chairman of Samsung planned to step down from management, concerning at the giant tech over a vacuum of leadership after Scion Jay Y. Lee was sentenced to jail for bribery. The Samsung’s display and chip head came with a surprised resignation as a big role was expected to be taken by him in respect to arrest of Lee in February. The smartphone maker of South Korea forecasted the record of operating profit of third-quarter in the same day this move came up; on the back of memory chip business which meant to be into the world leader building by Kwon (Maring, 2017). Kwon has emerged as Samsung’s public face after grandson of founder of company Jay Y. Lee, was detained on charges of corruption and then sentenced to the prison for five years in August amid a scandal that brought president of South Korea down. While the Samsung’s latest financial results show its business units operating smoothly, that in itself may create risk for Kwon, said Park Ju-Gun, who tracks the CEO’s score at corporate executives (Kim, 2017).
Volkswagen to recall approximately 5, 00,000 of its vehicles after the Environmental Protection Agency ordered; equipped software that tricked tests emissions; the CEO of the company announced to resign from the company within less than a week. The telegraph reported that Martin Winterkorn the CEO told to the board of the company that he would leave the post amid the growing scandal that now covers 11 million of Audi vehicles and VW worldwide. According to Winterkorn, misconduct of this level was not possible in the company like Volkswagen on such a large scale; this made him shocked and became the reason behind resigning the organisation. According to Winterkorn, VW should get a new start after his resignation. The German automaker’s shares were down by nearly 4% on Tuesday as a new lawsuit was filed by the US Justice Department which could have been result in tens of billions of dollar damages (Kieler, 2018).
It became publically known in the early weeks of 2011 that former CEO and later Chairman of Apple Inc. Steve Jobs, was taking a sick leave again. This announcement brought an 8.4% fall in the stock prices of Apple that was devaluating by billions of dollars. Along with this on the one more familiar ground, Stine Bosse the CEO of Apple announced to leave her position of CEO of the Danish Pension Fund TRYG. Within hours, the stock prices of TRYG increased by 4%. Accordingly, it seems that having a wrong or right CEO and having CEOs influence, the valuation of public companies can make a billion dollar difference in the organisation. Among academics, when more and more researchers pay attention towards this topic it seems to have skyrocketed. This allows exposure of new for new angles, increased rigor and relevance and at the same time, led to a somewhat inconclusive and confusing stream of research.
Research significance
From the above study it is clearly justified that the impact of CEO departure can either positively or negatively affects the share price of the company. It could be seen that in the case of Samsung the company had no impact on the share price due to departure of the company’s CEO. But in case of Volkswagen the CEO took a voluntary retirement due the misconduct in the organisation; while in case of Apple the organisation found a rise in its share price due to resignation of CEO the company had a rise of 4% in its share. But due to a medical leave of its vice president Steve Jobs it faced an 8.4% fall in the share price of the company. Therefore, it could be said that the departure of CEO might have positive, negative or no effect on the share price of the company.
References
Clayton, C.M., Hartzell, J.C. and Rosenberg, J. (2005) The Impact of CEO Turnover on Equity Volatility. The University of Chicago Press Journal, 78(5), pp. 1779-1808.
Dedman, E. and Lin, W-J. S. (2000) Shareholder Wealth Effects of CEO Departures:Evidence from the UK. [online] Available from: https://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp00498.pdf. [Accessed 13-06-18].
Egholm, A.C. and Nordstrom, J. (2011) Stock Price Reactions to CEO Turnover: Master Thesis in Management, 30 ECTS (master thesis). THE STOCKHOLM SCHOOL OF ECONOMICS, Sweden.
Fortune (2017) Samsung CEO Kwon Oh-hyun Announces Shock Resignation as Profits Surge. [online] Available from: https://fortune.com/2017/10/13/saumsung-ceo-kwon-surprise-resignation/. [Accessed 13-06-18].
Ishak, R. and Latif, R.A. (2012) CEO Succession and Shareholders Wealth in Malaysian Public Listed Companies. Elsevier, 65, pp. 173-179.
Kieler, A. (2018) Volkswagen CEO Resigns Amid Emissions Violation Scandal. [online] Available from: https://consumerist.com/2015/09/23/volkswagen-ceo-resigns-amid-emissions-violation-scandal/. [Accessed 13-06-18]
Kim, S (2017) In Surprise Move, Samsung CEO to Quit After Record Profit. [online] Available from: https://www.bloomberg.com/news/articles/2017-10-12/samsung-quarterly-profit-climbs-on-surging-chip-demand-displays. [Accessed 13-06-18].
Mansaku, I., Mansaku, S. and Tampakoudis, I (2016) An Empirical Comparison of the Major Stock Exchanges:NYSE, NASDAQ and LSE in Perspective. Academic Journal of Interdisciplinary Studies, 5(3).
Maring, J. (2017) Samsung’s CEO is resigning after 32 years with the company due to ‘unprecedented crisis’. [online] available from: https://www.androidcentral.com/samsungs-ceo-resigning-after-32-years-company. [Accessed 13-06-18].
McGee, P. (2018) Volkswagen to be restructured under new CEO. [online] Available from: https://www.ft.com/content/0cb359c4-3e4a-11e8-b7e0-52972418fec4. [Accessed 13-06-18].
Setiawan, D. (2011) An Analysis Of Market Reaction To CEO Turnover Announcement:The Case In Indonesia. International Business & Economics Research Journal, 7(2).
University Van Pretoria (2007) THE IMPACT OF CEO TURNOVER ON THE SHARE PRICE PERFORMANCE OF SOUTH AFRICAN LISTED COMPANIES. [online]Available from: https://repository.up.ac.za/bitstream/handle/2263/23533/dissertation.pdf;sequence=1. [Accessed 13-06-18].
Washkush, (2015) How Volkswagen’s emission crisis unfolded. [online] Available from: https://www.prweek.com/article/1365154/volkswagens-emissions-crisis-unfolded. [Accessed 13-06-18].
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
