August 2000
Matthew Clayton, Jay Hartzell, and Joshua Rosenberg
ABSTRACT
A change in executive leadership is a significant event in the life of a firm. Our paper investigates a potentially
significant consequence of a CEO turnover: a change in equity volatility. We develop several hypotheses about how
CEO changes might affect stock price volatility, and test these hypotheses using a sample of 872 CEO changes over
the 1979-1995 period. We find that volatility increases following a CEO turnover, even for the most frequent type,
when a CEO leaves voluntarily and is replaced by someone from inside the firm. Our results indicate that forced
turnovers, which are expected to result in large strategy changes, increase volatility more than voluntary turnovers.
Outside successions, which are expected to result in a successor CEO with less certain skill in managing the firm's
operations, increase
volatility more than inside turnovers. We also document a greater stock-price response to earnings announcements
around CEO turnover, consistent with more informative signals of value driving the increased volatility. Controls
for firm-specific characteristics indicate that the volatility changes cannot be entirely attributed to factors
such as changes in firm operations, firm size, and both volatility change and performance prior to the turnover.
Subject: Corporate Finance; Event Study Analysis; Investments/Volatility of Asset Prices
Classification: Empirical
Matthew Clayton
Institution: Department of Finance, Stern School of Business, New York University
Email: mclayton@stern.nyu.edu
Telephone: (212) 998-0309
Home Page: www.stern.nyu.edu/~mclayton
Jay Hartzell
Institution: Department of Finance, Stern School of Business, New York University
Email: jhartzel@stern.nyu.edu
Telephone: (212) 998-0359
Home Page: www.stern.nyu.edu/~jhartzel
Joshua Rosenberg
Institution: Department of Finance, Stern School of Business, New York University
Email: jrosenb0@stern.nyu.edu
Telephone: (212) 998-0311
Homepage: www.stern.nyu.edu/~jrosenb0
To download a copy of this paper click here
To request a copy of this paper click here
The Finance Department Working Paper Series has been generously sponsored by