Effect of CEO Passing Away to the Company: Finance Event Study Analysis

Finance Event Study Analysis
Student’s Name
Institutional Affiliation
Abstract
The change of guard in a firm is an integral occurrence in the growth of a business, company, or organization. The transition from one leader to a new one can sometimes have positive or adverse effects on the performance of a business. In this project, we will investigate the death of a Chief Executive Officer (CEO) and the impact it has on the operations and stock prices in a company. The span of the collected data is between the year January 2010 and November 2019. The research adopted an event study methodology to test the impact of a CEO’s death on stock prices. The event period of the study was 260 days, where -250 days covered the pre CEO death announcement period and +10 days covered post CEO death announcement. The event day was 0. The paired sampled statistics results illustrated that there was a positive average abnormal return (AAR) after and before CEO death announcement. Besides, the findings indicated that there was an optimistic cumulative average abnormal return (CAAR) after and before CEO death.
Keywords: CEO, period, findings, statistics, average abnormal return (AAR), stock prices, stock returns, death announcement, cumulative average abnormal return (CAAR), and collected data.
Finance Event Study Analysis
Introduction
The death of a CEO provides an exceptional case for exploration and evaluation. In this paper, I documented the change in stock prices before and after the demise of the CEO. Besides, I used thirty events of study to offer a detailed explanation of the impact the death of the CEO has on the company, business, or organization. The results obtained from the event study illustrates that abnormal returns are significant for companies, which entail an entrenched management system. Notably, the presence of a detailed management protocol poses a challenge for candidates who aim to succeed the slain CEO. The death of a CEO can influence the performance of a business enterprise either positively or adversely. The traditional finance theory stipulates that the vital role of a CEO is to capitalize on the wealth and investments of shareholders by formulating and setting achievable goals. CEO’s help in the spearheading and execution of business ideas, thus facilitating the growth of a company internally and externally. The decisions a CEO makes act as determinant of whether the wealth and investments of shareholders are likely to be maximized. Therefore, the death of a CEO has substantial effects on whether a business likely survives.
The market efficiency hypothesis postulates that stock prices change whenever there is new information regarding top management. For example, when the CEO of a company dies, the shares of a business enterprise are likely to depreciate, thus derailing the performance and operations of a company. The replacement of a former CEO is expected to follow two patterns: insider and outsider. Replacing a CEO with one who is an insider is intrinsic since he/she possesses more information about the company than the latter (Baker & Xuan, 2016, p. 75). For that reason, an insider CEO is likely to spur and steer the growth of the company, thus helping the business enterprise bounce back to normalcy quickly. However, if the company intends to change its strategy after the death of its CEO, hiring an outsider individual would be the most advantageous thing for the institution. Arguably, the new CEO is likely to have fresh ideas, which can enhance the performance of the company. The replacement of a CEO has a significant reaction to the market. For instance, some investors resonate that the change of guard is better since will maximize their wealth and investments. Notably, investors earn abnormal returns in window periods.
Purpose of the Study
To assess and evaluate the effect the death of a CEO has on the stock returns of various firms as listed in the Excel Sheet.
Data/Sample
The study comprises 30 firms as listed at the Reuters, New York Stock Exchange, Bloomberg, and other relevant stock monitoring agencies. The listed companies consist of Chief Executive Officers (CEO’s) who had passed away while at the helm of the management of the institution. The period of data collection is between January 2010 and November 2019. The research paper utilized secondary sources of information to obtain and verify the data. The data about the death of a CEO was available for retrieval from the Reuters and Bloomberg company announcements segment on their website. Data regarding the demise and replacement of the CEO was available on the NYSE library. The research adopted an event study methodology to test the effect the death of CEO had on the various companies. The method is a statistical technique, which will evaluate the impact of an occurrence on the performance and value of the firm (Malik, 2012...