Our findings suggest there is a fruitful area to further explore the impacts of
CEO turnover of one industry on the intra-industry and other related industries. In
addition, since there is a negative reaction to the stock returns of the rivals when the
new CEO of the announcing firm is an outsider, we surmise rival firms will not
passively react to that. In contrast, the relation of them could be dynamical. Therefore,
future researches can further explore the influences of CEO turnover of one industry
on the dynamic relationships of the intra-industry and even other related industries.
To follow Fee and Thomas (2004) analysis the data by announcing firm’s key
suppliers and customers could be one way to understand the relationship more deeply.
40
Table 1
Summary of predictions
This table summarizes the predictions of the rational-adaptive, disruptive and scapegoat perspectives regarding the signs of announcement period abnormal returns to the announcing firms and their rivals, customers, and suppliers.
Rational-adaptive Perspective Disruptive Perspective Scapegoat Perspective
Announcers Positive Negative Insignificant
An important source of organizational adaptation, because variety increases chances for survival (Campbell, 1965; Weick, 1979).
Accompanied by the revitalization of productivity, strategic reorientation and improved organizational performance (Guest, 1962; Goodstein and Boeker, 1991; Denis and Denis, 1995; Huson, 2004). To establish a competitive advantage in the future environment. (Greiner and Bhambri, 1989)
Leading to organizational instability, an increase in tensions, and deterioration of morale and productivity (Allen et al. 1979; Grusky 1963, 1964).
Trigger additional turnover by prompting deterioration in attitudes toward the organization (Staw, 1980). Many important activities, such as construction projects, the purchase of new
equipment, and strategic planning were postponed or halted. Cost cutting and downsizing activities were also frequently undertaken (Khauq et al., 2006).
When there is poor performance due to chance or factors outside control, the removal of the incumbent top manager serves to apportion blame and a new manager (with equal ability) is selected (Gamson and Scotch, 1964; Khanna and Poulsen, 1995)
To appease stakeholders and mask more fundamental organizational weaknesses during performance slides (Brown 1982, Gamson and Scotch 1964, Lieberson and O’Connor 1972).
Competitors Unrestricted Positive Insignificant
+: Inspire rival CEOs to make more efforts to their firms.
-: The industry rivalry will be more intense.
A drop in production efficiency result in higher prices and lower output, which may induce a demand decrease to the announcer. Competitors can take advantage of demand shift (Lang and Stulz, 1992).
Since announcer’s managerial change has relatively little influence on organizational performance, policies, stock returns, etc., the impact on competitors is also minimal.
Customers
Suppliers
Positive
Facing competitive pressure to make organizations ideally suited for the creation and delivery of customer value (Peck and Juttner, 2000).
Positive
The demand of inputs may increase due to announcer’s revitalization of productivity (Lang and Stulz, 1992) and the increase in competitiveness of the announcer.
Negative
Higher prices and lower output of announcer induce higher costs to customers, or customers need to search for another supplier.
Negative
Higher prices and lower output may lead to lower demand of products to announcers (Lang and Stulz, 1992), therefore lower demand of inputs to suppliers.
Insignificant
Since there is relatively little influence on organizational performance, policies, stock returns, etc., the impact on customers is also minimal.
Insignificant
Since there is relatively little influence on organizational performance, policies, stock returns, etc., the impact on suppliers is also minimal.
41
Table 2
Summary of predictions by subsamples
This table summarizes the predictions of the rational-adaptive and disruptive perspectives regarding the signs of announcement period abnormal returns of the CEO turnover subsamples on the announcers, the rivals, and their customers and suppliers. Panel A classifies the sample by the reasons of CEO turnover, and panel B classifies the sample by the orgin of the new CEO.
Panel A: Forced Turnover vs. Voluntary Turnover
Rational-adaptive 1. Followed by small increasesin operating income (Denis
2. Higher percentage of employee layoffs or wage cuts (Denis and Denis), which might lead to more deteriation of employee morale.
Insignificant
For reasons such as family problems, location, or economic conditions it will produce less of a demoralization effect than if turnover is perceived to result from the nature of the work, pay, or supervision (Steers and
42
Table 2
Summary of predictions by subsamples
(Continued)Panel B: Outside Succession vs. Inside Succession
Rational-adaptive perspective Disruptive perspective
Announcer
Outside succession
Inside succession
Positive
3. Ability to envision, implement a broad range of strategic options and to make fundamental changes in firm’s strategy and structure (Carlson, 1962). Have the skills and capabilities to make good on the change mandate (Khurana and Nohria, 2001). Having
5. Inside succession negates much of the potential adaptation value of turnover
6. Outside successor will initiate organizational changes more successfully (Helmich and Brown, 1972; Huson et al., 2004; Zajac, 1990), therefore the effect of increase in rivalry is expected to be larger.
Positive
More likely to inspire rival CEOs to make efforts to their firms instead of increasing industry rivalry.
7. Outsiders are more likely to change policies and strategies after
43
Table 3
Sample distribution
The sample consists of 1546 CEO turnover announcements during the period 1987 to 2004.
It is manually collected by identifying change in the position of Chief Executive Officer (CEO) from news in The New York Times, The Wall Street Journal, The Washington Post, Dow Jones Business News and Dow Jones News Service.
Year of
44
Table 4
Announcement period abnormal returns
to the announcing firmAnnouncement period cumulative abnormal returns (CARs) are associated with a sample of 1546 CEO turnovers of firms with stock returns data over the period 1987 to 2004.
Abnormal returns are computed using the standard market model procedure with parameters estimated over the 250-day period beginning fifty days before the CEO turnover announcement. CEO changes are designated forced if the reason given for the change is forced resignation or poor performance. If neither reason is given, a change is classified as forced if the departing CEO leaves the firm and the departing CEO is not between the ages of 64 and 66. A CEO change is classified as a voluntary turnover if the reason given for the change is retirement or normal succession and the departing manager is between the ages of 64 and 66. Inside successors were defined as individuals who were previously employed within the firm; outside succession occurred when the newly appointed CEO was not employed by the firm or was employed but less than one year at the time of the succession.
The symbols *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively (t-statistics are in parentheses).
45
Table 5
Announcement period abnormal returns to rivals, customers and suppliers
This table reports cumulative abnormal returns (CAR) to Rivals, Main Customer, Dependent Customer, Main Supplier, and Dependent Supplier industries. The sample consists of 1546 CEO turnovers during the period 1987 to 2004. Supplier and customer industries are identified using the benchmark input-output accounts for the U.S. economy. For each announcing firm’s industry, the Main Customer Industry is the industry that buys the highest percentage of the announcer industry’s output. The Dependent Customer Industry is the industry whose production depends on the announcer industry’s output more than any other customer industry. The Main Supplier Industry is the industry that supplies the main input to the announcer’s industry. The Dependent Supplier Industry is the supplier industry whose percentage of output sold to the announcer’s industry is higher than that of any other supplier industry. A customer industry is included in the sample if its total dollar amount spent on the input bought from the announcer’s industry represents more than 1% of its total output. A supplier industry is included in the sample if it sells more than 1% of its total output to the announcer’s industry. CARs to rivals, suppliers, and customers are estimated by firms in the corresponding industry. Panel A reports CARs for the overall sample. Panel B (Panel C) reports CARs for the subsample of turnovers that is classified as forced (voluntary) turnovers. Panel D (Panel E) reports CARs to the subsample of CEO turnovers with inside (outside) successors.
Panel A: CAR (%) to the overall sample of CEO turnover events
IndustryThe symbols *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively.
46
Table 5
(Continued)Panel B: CAR (%) to the subsample of forced CEO turnovers
IndustryPanel C: CAR (%) to the subsample of voluntary CEO turnovers
IndustryThe symbols *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively.
47
Table 5
(Continued)Panel D: CAR (%) to the subsample of CEO turnover events with inside successors
IndustryPanel E: CAR (%) to the subsample of CEO turnover events with outside successors
IndustryThe symbols *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively.
48
Table 6
Least squares regression of cumulative abnormal returns to rival firms
The sample includes 1546 CEO turnover announcements during the period 1987 to 2004. The dependent variable is the cumulative abnormal return to rival firms for the (-2, 2) window.
Abnormal returns are estimated using a market model. The dependent variable is trimmed at the 1st and 99th percentile. Rivals are all single-segment firms operating in the same industry as announcing firm. Herfindahl Index is the proxy of industry concentration. The log of market capitalization measured by outstanding shares multiply share price of the day before CEO announcement is our proxy for firm size. Forced turnover dummy is equal to one when the turnover is classified as forced. Outside successor dummy is equal to one when the new CEO is from outside the firm. Announcer CAR is the cumulative abnormal returns to the announcer for the (-2, 2) window.
X Y=Rival (-2, 2) CAR
(1) (2)
Herfindahl index 0.00035 0.00079
(0.84) (0.19)
Firm size of announcer -0.00017 -0.00003
(-0.68) (-0.14)
Forced Turnover Dummy 0.00595*** 0.00655***
(4.81) (5.20)
Outside Successor Dummy -0.01039*** -0.01149***
(-8.49) (-9.22)
Announcer CAR 0.02153***
(5.26)
Intercept 0.00469 0.00286
1.33 0.79
Adjusted R-square 0.0032 0.0051
N 38530 37959
The symbols *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively (t-statistics are in parentheses).
49
Table 7
Least squares regression of cumulative abnormal returns to customers
The sample includes 1546 CEO turnover announcements during the period 1987 to 2004. The dependent variable is the cumulative abnormal return to customers for the (-2, 2) window.
Abnormal returns are estimated using a market model. The dependent variable is trimmed at the 1st and 99th percentile. The Main Customer industry is the industry that buys the highest percentage of the announcer industry’s output. The Dependent Customer industry is the industry whose production depends on the announcer industry’s output more than any other customer industry. Herfindahl Index is the proxy of announcer industry concentration. The log of market capitalization measured by outstanding shares multiply share price of the day before CEO announcement is our proxy for announcer firm size. Forced turnover dummy is equal to one when the turnover is classified as forced. Outside successor dummy is equal to one when the new CEO is from outside the firm. Customer Input Coefficient is the dollar amount of the announcer industry’s output sold to the corporate customer industry divided by the total output of the corporate customer industry. A customer industry is included in the sample if its Customer Input Coefficient is greater than 1%. Customer Negative CAR Dummy is a dummy variable that equals one if the dependent variable is negative. Announcer CAR is the cumulative abnormal returns to the announcer for the (-2, 2) window.
X Y=Customer (-2, 2) CAR
MC DC
Herfindahl index of announcer 0.41566***
(32.52) Cust. Input Coeff* Cust. -CAR Dummy Announcer CAR
Intercept
Adjusted R-square N
The symbols *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively (t-statistics are in parentheses).
50
Table 8
Least squares regression of cumulative abnormal returns to suppliers
The sample includes 1546 CEO turnover announcements during the period 1987 to 2004. The dependent variable is the cumulative abnormal return to suppliers for the (-2, 2) window.
Abnormal returns are estimated using a market model. The dependent variable is trimmed at the 1st and 99th percentile. The Main Supplier industry is the industry that supplies the main input to the announcer industry. The Dependent Supplier industry is the supplier industry whose percentage of output sold to the announcer industry is higher than that of any other supplier industry. Herfindahl Index is the proxy of announcer industry concentration. The log of market capitalization measured by outstanding shares multiply share price of the day before CEO announcement is our proxy for announcer firm size. Forced turnover dummy is equal to one when the turnover is classified as forced. Outside successor dummy is equal to one when the new CEO is from outside the firm. Supplier Percentage Sold is the percentage of the supplier industry’s output sold to the announcer’s industry. Supplier Negative CAR Dummy is a dummy variable that equals one if the dependent variable is negative. Announcer CAR is the cumulative abnormal returns to the announcer for the (-2, 2) window.
X Y=Supplier (-2, 2) CAR
MS DS
Herfindahl index of announcer 0.12912***
(5.77)
The symbols *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively (t-statistics are in parentheses).
51
Table 9
Summary of results
This table displays a summary of the signs of announcement period abnormal returns to the announcing firms and their rivals, customers, and suppliers. The sample includes 1546 CEO turnovers during the period 1987 to 2004. Customer and supplier industries are ident ified using the benchmark input-output accounts for the U.S. economy as described in Table 5. Abnormal returns are estimated using a market model. Abnormal returns to rivals, suppliers, and customers are estimated using all firms in the corresponding industry. The classification of forced and voluntary CEO turnover is based on the reason of incumbent CEO for leave. The other classification of outside successor and inside successor is according to the origin the new CEO.
Predictions Results
Rational-adaptive Perspective
Disruptive Perspective
Scapegoat Perspective
Overall sample
Forced turnover
Voluntary turnover
Outside successor
Inside successor Announcers Positive Negative Insignificant Positive Insignificant Positive Positive Insignificant Competitors Unrestricted Positive Insignificant Insignificant Positive Insignificant Negative Positive
Customers Positive Negative Insignificant Positive Positive Positive Positive Positive
Suppliers Positive Negative Insignificant Positive Positive Positive Positive Positive
52
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