How a Change in CEO Can Impact Stock Market Price?
Stock Market Reactions to New CEO Hires
If your company is faced with the prospect of a new CEO hire as part of succession planning, you may be thinking about the implications of choosing either an internal or external candidate. Most companies see a shift in their stock market value when their leadership changes, and it can be difficult to anticipate how this would impact your organization. This article breaks down the research on stock market reactions to internal vs. external CEO hires, and can help you decide how to best protect the financial future of your company.
Internal vs External CEO Succession Candidates
Our article on Selecting a CEO: Internal vs. External Candidates explores the relative advantages and disadvantages of both types of succession candidates. In making the best choice for any given company, context is an important consideration. The same can be said for anticipating stock market reactions to CEO changes.
Before diving into the specific situations in which choosing an internal or external CEO makes sense, it’s important to remember that many factors come into play to determine stock market values. The current economic climate will always impact investors. Each country’s legal regulations will also be relevant. Finally, every industry will face different challenges when planning a CEO hire. To best understand how an internal or external CEO may impact your company, it is always best to consult an experienced succession consultant.
When Does an External CEO Make Sense?
In times of instability for an
organization, replacing an existing CEO with an external candidate sometimes
makes sense to investors. Boards are more likely to suggest external candidates
that will change the company’s strategic direction if a company’s prospects are
poor[i].
The decision to introduce an external hire may result in a positive stock
market reaction in times of instability or uncertainty[ii].
When Should We Choose an Internal CEO?
As with external hires and instability, internal hires are a natural first choice for companies that are seeing success with their current strategic direction. When more firm- or industry-specific knowledge is needed, it is safer to look internally[iii]. Further, research supports the fact that preparation for the loss of a CEO by choosing an internal successor is associated with positive stock market reactions[iv]. Naming an internal “heir” indicates confidence in your staff, and can be a boost to many members of the organization considering a future with your company. Further, having this heir step in after the unexpected loss of a CEO is associated with higher returns[v].
What Lessons Should We Learn?
In general, the stock market disfavors surprise[ii]. Research has shown that hesitating to announce a new CEO indicates uncertainty and a lack of preparedness, which will result in negative stock market reactions. With the average CEO tenure currently sitting at only 5 years, it is essential to plan ahead[v]. Your organization should have contingency plans prepared, in case your CEO leaves suddenly. The best way to plan ahead is to implement a succession plan, which identifies potential internal candidates to fill a vacant CEO position, as well as detailing the requirements for success as a CEO, should your company choose to hire externally. Integrating this plan into your company’s strategic plan will further help you decide which kind of candidate is the right fit for you.
How SIGMA Can Help Strategize Your Succession Plan
At SIGMA, we want to help your company be more effective and proactive with a good succession plan. Our Succession Planning Launch Series will deliver your company a personalized succession plan in just 30 DAYS with only 8 hours of time from your senior leadership team. For more information on our Succession Process, Launch Series, or Succession Planning solutions, contact us and learn more about how we can help your organization plan for the future.
[i] Farrell, K. & Whidbee, D. A. (2003). Impact of firm performance expectations on CEO turnover and replacement decisions. Journal of Accounting and Economics, 36, 165-196.
[ii] Rose, C. (2019). Stock market reactions to CEO succession announcements: Inside versus outside recruitment? Journal of Management and Governance, 23, 33-65.
[iii] Krell, E. (Jan 7, 2015). Weighing internal vs. external hires. Retrieved from: https://www.shrm.org/hr-today/news/hr-magazine/pages/010215-hiring.aspx
[iv] Behn, B. K., Riley, R. A., & Yang, Y. (2005). The value of an heir apparent in succession planning. Corporate Governance: An International Review, 13(2), 168-177.
[v] The Economist. (Nov 27, 2014). Making a success of succession. Retrieved from: https://www.economist.com/business/2014/11/27/making-a-success-of-succession