Given that CEOS play a large role in determining a company’s strategy and operations, it’s no wonder that the appointment of a new CEO can have a significant impact on a firm’s share price.
Statistics show that bringing in a fresh face can cause a rise in the stock price if the market thinks that the new appointment will improve its performance. However, as history has shown many times, It can also cause the share price to fall if the market thinks the newcomer will either fail to live up to their predecessor or that the previous CEO’s departure suggests undisclosed problems.
A study by James M. Citrin of consultancy Spencer Stuart suggests that initial reactions may not be that accurate and may provide a poor guide to the firm’s share price’s subsequent performance. Analysis of 314 listed companies who named a new CEO showed that 49% saw their share price rise, 49% fell, and 2% essentially stayed the same after the first trading day.
Of those that saw their share price rise, a small majority (55%) saw their share price go up in the longer term. But of those that saw their price go down, a bigger proportion would
see long-term gains after the first day. This effect was particularly marked when the announcement of a new boss led to dramatic moves. Indeed, of the 20 companies that saw a
rise of more than 5% on the new CEO’s first day, less than half (40%) would see the share price continue to rise during the rest of the time that the new CEO was in office. However, nearly four-fifths (79%) of the 14 companies whose shares plunged by 5%
more saw long-term gains. This suggests that a contrarian strategy of waiting for a day to gauge the market’s reaction to the change and then buying the shares that fall by a large amount (and selling those that rise by a large amount) can work well.
The moral of the story? Sometimes it is simple case of better the devil you know!