The Impact of CEO Turnover on Equity Volatility
August 2000
Matthew J. Clayton, Jay C. 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: Investments/Volatilility of Asset Prices; Corporate Finance/Corporate Governance
Classification: Empirical
Matthew J. Clayton
Institution: Stern School of Business, New York University
Email: mclayton@stern.nyu.edu
Phone: (212) 998-0309
Home Page: http://www.stern.nyu.edu/~mclayton/
Jay Hartzell
Institution: Stern School of Business, New York University
Email: jhartzel@stern.nyu.edu
Phone: (212) 998-0359
Home Page: http://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
Home Page: www.stern.nyu.edu/~jrosenb0
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