Short Term Market Reactions to CEO Turnovers: An Event Study of American and German Corporations

Thomas Grøstad & Nicolai Berg Johansen

Student thesis: Master thesis


This thesis examines the short-term investor reactions to Chief Executive Officer (CEO) successions in the United States and Germany. The authors constructed a brand new data set, which contains 162 CEO successions of the largest companies listed on Frankfurt Stock Exchange (FWB) in Germany and New York Stock Exchange (NYSE) in the United States. The successions were gathered over a 15-year time period, between 2000 and 2015. The reactions in the financial markets where captured through the application of MacKinlay’s (1997) event study methodology, and statistically tested for any cumulative average abnormal return (CAAR) through 35 constructed hypotheses. In every CEO succession event, the authors collected a number of key independent variables, which in turn became the components of most of the created hypotheses. The independent variables comprised of gender, age, origin of the successor, tenure of the predecessor, company size and financial performance before the announcement. Furthermore, the most intriguing results were deeper analyzed in the reflection of the diverse corporate governance systems in the respective countries, as well as previous literature on CEO turnovers. The authors argued that substituting the CEO is the most influential mechanism the board of directors may apply in the pursuit of value creation. Thus, some kind of reaction in the financial market could be expected. The overall CAAR analysis indicated a positive market reaction to CEO turnovers, yet only statistically significant at a 90 % confidence level. The authors also argued that the differences between corporate governance systems in the United States and Germany, could affect the expectations to the newly appointed CEO. The aggregated CAAR analysis of each market suggested minimal differences in investor reactions to a CEO succession. Furthermore, the authors identified four other interesting findings. First, investors react very positively to externally hired CEOs in both US and Germany. Second, investors react positively to CEO turnovers amongst American and German firms that suffered from Poor financial performance. Third, investors have strong confidence in young CEOs in German companies. Last, there are indications of differences in the reception of male and female CEOs in the US.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
Publication date2015
Number of pages145