The impact of resumption of former top executives on stock prices: an event study approach.
Yang, Tai-Ning
1. Introduction
A top executive who resume his or her former office will find that
completely reinventing the company and re-injecting new blood is a major
challenge. When their business environment is changing dramatically,
enterprises are likely to change top executives in response to
particular challenges, to achieve market dominance or to face the
emergence of new competitors. However, newly appointed top executives
commonly lead companies into trouble because of poor short-term
performance and improper decision-making. As a result, a company may
return a former top executive to his position.
Although a veteran of a company may be well-versed in the overall
operating profile of a company and identify problems, they tend to be
conservative and are not good at exploiting new technologies for
innovation (Mian 2001). In many cases, the performance of top executives
who resume their former offices is mixed: the stock price of the
world's largest coffee chain store, Starbucks, fell drastically
when its founder Schultz resumed his former position. However, Dell
reinvented the business model of Dell Inc.; and Apple's top
executives Steve Jobs has been called the most successful resuming top
executives, thanks to the his creative revolution of the company's
business strategy. The capabilities of one man, however, cannot produce
more than the spirit of the team under him can support. Causes of
success are worthy of exploration. Some top executives may be not
willing to revolutionize the companies that they helped to develop when
they held their position previously. The successful example of Apple
Computer's designing stunning new technological products, such as
the iPod and the iPhone demonstrates the outstanding creativity of Steve
Jobs and excellently organized teamwork.
Topics worthy of discussion include business performance before the
announcement of the replacement of the top executives, the time between
announcement and his resuming his role, and whether the staff of the
firm and the familiarity of the new top executives with the
business's operations will support radical changes. Whether the
replacement of top executives is good or bad for companies can be
observed by the response of the stock price of the firm market.
Additionally, the company's business performance upon the
announcement that the top executives will be replaced substantially
affects the average cumulative abnormal returns. The newly-appointed top
executives has no significant effect on market reaction (e.g. Warner et
al. 1988; Lubatkin et al. 1989; Barro, J., Barro, R. 1990; Ball, Torous
1998; DeFonda, Park 1999). Some scholars believe that new top executives
do less well than expected in terms of business revenue. Puffer and
Weintrop (1991) argued that the revenue of a business following the
appointment of new top executives is generally lower than expected by
analysts.
The significant effect of the resumption of duty by top executives
on the value of a company is evident, as is the inadequacy of studies of
the resumption of duty by former top executives in Taiwan. According to
the relevant regulations, the replacement of top executives is important
information that should be publicly disclosed on the platform of the
information system of Taiwan's Stock Exchange within a time limit.
2. Literature review
Top executives who perform poorly are replaced by those with better
capabilities to enhance corporate performance (Kaplan 1994; Goyal, Park
2002; Alas 2008; Vallejo-Martos 2011). The separation of ownership from
management creates the agency problem: top executives make decisions and
behave in a manner that maximizes their personal interest rather than
the wealth of shareholders. To address the agency problem, a company
normally limits the self-interested behaviors of its top executives by
urging them to sign contracts with external shareholders. They have a
significant impact on business performance and the way in which
decisions are made at their companies. Theoretically, top executives, as
their title suggests, are those who hold the most important posts in an
organization; guide the overall operations of the company, such as
replacing other employees in important posts; set business strategy, and
make major decisions. Supporters of this theory believe that companies
select experienced experts as leaders to improve organizational
performance (Borokhovich et al. 1996; Lausten 2002; Ginevicius,
Vaitkunaitc 2006; Strandskov 2006; Curado, Manica 2010).
The theory "Ritual Scapegoating Theory". Its adherents
believe that the replacement of leadership has no impact on business
performance; the replaced leader is a scapegoat for poor business
performance (Kang, Shivdasani 1995; Nelson 2005). In studies of the
relationship between the replacement of top executives and business
performance, the theory is called the "common-sense theory".
An organization changes leadership when performance is poor, and so the
vicious circle is set in motion (Parrino 1997; Conyon 1998; Farrell,
Whidbee 2002, 2003).
Owing to the changing environment and fierce market competition,
the replacement of top executives, leadership styles, lengths of tenure
and the organization of enterprises differ from those of the past
(Markovic 2008; Vallejo-Martos 2011). Top corporate executives must
grasp the overall operations of an enterprise and its major decisions.
The performance of executives who resume former offices should be
evaluated against market expectations. Such top executives tend to have
experience of numerous enterprises, and they must face many challenges
and develop new perspectives to drive change. If the enterprise is
insufficiently competitive and lacks capacity, veterans of the firm
cannot help. The return of top executives may facilita the improvement
of business efficiency. The replacement of top executives somewhat
affects the transfer of power and organizational changes. As well as the
top executives, environmental factors, the age, size and performance of
the organization, employee support and coordination are also major
considerations. A change of top executives can be regarded as an
enterprise. However, studies of the impact of the resumption of offices
by top executives on business performance are few and the topic is
overdue for exploration. Like the coordination of the external and
internal environments of an organization and the benchmarks improve
business performance. Leadership greatly affects the enterprise.
This study investigates the impact of the return of former top
executives on the stock prices of their enterprises; reviews the
reactions of the stock prices, and discusses the value of the
information that top executives are to resume their offices, using the
event study methodology. The effect of the disclosure of information
regarding the resumption of old offices by top executives of publicly
listed electronics companies in Taiwan is examined. Until now, most
domestic discussions in the field have focused on such topics as changes
of management, abnormal factors and the shareholder wealth effects
without consideration of the impact of top executives' resumption
on the performance of stock price of their enterprises.
3. Research method and data description
3.1. Sample period and data sources
The research period of this study starts during 1995-2009, which
comprised 21 resumptions of duty by board directors and 50 by general
managers. Most of the data concerning informational disclosures by the
sample companies was downloaded from the "Public Information
Observation Website" of Taiwan Stock Exchange. The purpose of this
study aims to investigate the impact of top executives' resuming
offices on the stock prices of their companies. Therefore, resumptions
of duty by top executives were grouped into entrepreneurial resumptions
of duty and general resumptions of duty. The resumption of duty by a top
executive who is a founder of the company is an entrepreneurial
resumption of duty. The raising of a general employee to a top executive
office is regarded as the general resumption of duty. To provide more
detailed analysis, these two of events were further categorized into the
external and internal resumption of duty. The resumption of a top
executive position by a company founder who has served in other
companies after leaving the present company is an external resumption of
duty. The transfer of a founder who was temporarily working in a
particular department of a company back to a top executive position is
an internal resumption of duty.
Company stock price data are downloaded from the "Taiwan New
Economic Journal (TEJ)" database. The purpose of this article was
to determine whether entrepreneurial resumption of duty and general
resumption of duty affect stock prices and rapidly become public
information. The impacts of the resumption of duty by top executives on
stock prices are also explored. External resumption of duty refers to
the situation in which a former top executive who has worked for other
companies resumes his position in the company of interest. In the
following, we define five terms used in event study methodology and
determine sample selection principles, research period and data sources.
The observation period ran 121 trading days from the 105 trading
days before the event date to the 15 trading days after the event date.
The date of resumption of duty by a top executive is denoted as No. 0
transaction day, or "0". No. t transaction day before the
resumption of duty by a top executive is represented by "-t"
while No. t transaction day after the resumption of duty by a top
executive is represented by "+t"
3.2. Research method
This study adopted the event study methodology (Brown, Warner 1980;
Corhay, Tourani 1994; Pantzalis et al. 2000; Chen, Su 2010; Lai et al.
2010; Wang, Chuang 2010) to analyze the impact of resumption of top
executives on stock price before and after the announcement of such
event. This method assumes that the market quickly and sufficiently
responds to public information whenever specific events happen. Namely,
when a company releases important information, its stock price quickly
and sufficiently reflects this information. In addition, we also
explored whether such event would lead to any abnormal return (AR) for
the company.
3.2.1. Market model
The widely-used market model is utilized to examine the impact of
information about the resumption of duty by a former top executive on
stock price, and such information can result in AR (Wang et al. 2010;
Yang et al. 2010). The market model in event study analysis was as
follows.
[R.sub.it] = [[alpha].sub.i] + [[beta].sub.i] [R.sub.mt] +
[[epsilon].sub.it] (1)
where [R.sub.it] and [R.sub.mt] respectively denote the returns of
the stock i and market in period t; [[alpha].sub.i] is the intercept
term; [[beta].sub.i] measures the system risk of the stock i, and
[[epsilon].sub.it] is the error term.
3.2.2. AR (Abnormal Return)
The event study methodology was utilized to identify the existence
of abnormal return, which can be calculated by subtracting expected
returns from actual returns. The equation is as follows:
[AR.sub.it] = [R.sub.it] - E([[??].sub.it]), (2)
where [AR.sub.it] denotes the abnormal return of stock i in period
t; [R.sub.it] is the actual returns of company i in period t, and
E([[??].sub.it]) is the expected returns of stock i in period t.
3.2.3. CAR (Cumulative Abnormal Return)
As [AR.sub.it] is subject to the impact of error, the average of
all cumulative abnormal returns after the event happened was used to
reduce the impact of errors on the stock returns. The average AR is
defined as,
[AAR.sub.t] = 1/N [N.summation over (i-1)] [AR.sub.it], (3)
where the average AR from the specific date [[tau].sub.1] of the
event period to [[tau].sub.2] th is added to obtain the CAR of that
period; namely, the CAR of a total of t days ([tau] = [[tau].sub.2] -
[[tau].sub.1]) from the [[tau].sub.1] th to the [[tau].sub.2] th event
date, and the equation is as follows:
[CAR.sub.t] ([[tau].sub.1], [[tau].sub.2]) = 1/N
[[[tau].sub.1].summation over (t=[[tau].sub.1])] [AAR.sub.it]. (4)
The average AR and CAR can improve AR, in particular, the testing
capabilities of the impacts on stock prices for specific events.
4. Empirical result
4.1. Abnormal Returns (AR) upon return of Chairman and General
Manager
Table 1 shows the results on the behavior of AR and its t-test
statistics for Taiwan's listed electronics stock on event window
after the announcement dates of the resumption of top executives. For
the case of the return of Chairman, the 15th day (t = 1.9363) is
associated with significantly positive AR. Additionally, in the 15 days
following the event day, the 8th and the 10th days are associated with
significantly negative AR. These evidences suggest the return of a
Chairman has a significantly positive effect on stock prices before the
event window because information is exposed to the public in advance.
This result indicates that information may leak out before the
announcement dates.
Upon the case of the return of a General Manager, in the 15 days
before the event day, the 8th and 13th days are associated with
significantly negative AR. In the 15 days following the event day, the
first day is associated with a significantly negative AR, while the 4th
and 9th are associated with significantly positive AR. These evidences
suggest that investors respond differently before and after the
announcement of the return of General Manager, which does not
necessarily lead to a desirable impact on the market value of the
company.
To summarize, as indicated by the empirical results of the returns
of Chairman and General Manager, we can observe that information
regarding their returns may leak out before the announcement dates so
that investors are enable to respond to this information in advance.
Accordingly, abnormal returns occur. Also, around the announcement
dates, different investors respond differently. Generally, the return of
top executives does not significantly influence investors'
decisions. Also, negative abnormal returns can be observed regardless of
the return of a Chairman and General Manager. A comparison of results
concerning abnormal returns associated with returns of the Chairman and
General Manager reveal that information regarding their returns may be
leaked before the announcement date, so investors respond to stock
prices in advance.
Many studies pay attention to explore the relationship between top
executives turnover and corporate performance, and ignore the returning
of top executive. However, the empirical results of this study indicate
that the returning of top executives does not necessarily result in
improved performance of stock price, provided warning for investors that
there is no need to overestimate the reformative impact of returning of
top executives.
4.2. Cumulative Abnormal Returns (CAR) upon return of Chairman and
General Manager
Upon the return of a Chairman as shown in Table 2, the average
cumulative abnormal returns are positive for four days (-15th ~ -12th)
before the announcement date but turn negative after the announcement
date until the 12th day. The response of the return of top executives is
continuously negative after the event day. Moreover, in the 15 days
before the event day, the 15th day is associated with significantly
positive CAR. In 15 days following the event day, the 14th and 15th are
associated with significantly negative CAR. The return of a Chairman has
a significantly positive effect on stock prices before the event window
as information is provided to the public in advance. Upon the return of
a General Manager, in the 15 days before the event day, the average
cumulative abnormal returns are negative before and after the
announcement date, in which the CAR is significant negative from -8th to
10th days.
The results for CAR upon the return of a Chairman and General
Manager are compared. They demonstrate that the news of the return of a
Chairman is likely to leak before the announcement date and investors
respond to stock prices in advance. Accordingly, abnormal returns are
identified. However, investors react negatively before and after the
date of an announcement of the return of top executives, and
particularly of the return of a General Manager. Therefore, the return
of these officers does not bring about better prospects for the company.
5. Conclusion
This study examines the impact of the returning of top executives
on average cumulative abnormal returns. The results demonstrate that the
return of top executives has a significantly negative impact on market
value. The decision to bring back top executives does not necessarily
result in improved performance of stock price. Companies are therefore
advised cautiously to evaluate whether they should change their top
executives to avoid fluctuations in stock price and damage to the
interests of their investors. The return of top executives is not
expected to have a positive effect on stock price.
Given the limit of availability for empirical data, examination on
the personal attributes of the returning top executives is not
conducting. As an example, whether top executives previously stepped
down from that office voluntarily or non-voluntarily may result in
different outcomes upon his return, and this fact may represent a
limitation on the findings of this study. Meanwhile, the ethics of
leadership for top executives might influence our findings.
doi: 10.3846/16111699.2011.634922
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Tai-Ning Yang
Department of International Business Administration, Chinese
Culture University, Taipei, Taiwan
E-mail:
[email protected]
Received 13 June 2011; accepted 20 October 2011
Tai-Ning YANG (Dr) is Chairman of Department of International
Business Administration, Chinese Culture University and holds PhD in the
Graduate School of Business Administration, National Taiwan University.
His current research interests are in the area of international business
theory, global strategic management, and industry analysis. His papers
appeared in Journal of American Academy of Business, International
Journal of Business and Strategy, Academy of Taiwan Business Management
Review, Journal of East China University of Science and Technology and
others.
Table 1. Results of AR on resumptions of Chairman and
General Manager
Window Chairman General Manager
AR t-test AR t-test
-15 0.989 1.9363 * -0.053 -0.134
-14 -0.298 -0.584 -0.169 -0.426
-13 -0.498 -0.975 -0.683 -1.726 *
-12 -0.127 -0.249 -0.338 -0.853
-11 -0.264 -0.516 0.195 0.492
-10 -0.104 -0.203 -0.150 -0.379
-9 0.067 0.139 -0.240 -0.606
-8 0.013 0.025 -0.676 -1.707 *
-7 -0.337 -0.660 -0.275 -0.695
-6 -0.454 -0.888 -0.280 -0.708
-5 -0.029 -0.056 -0.103 -0.261
-4 -0.043 -0.084 -0.515 -1.301
-3 0.751 1.471 -0.119 -0.301
-2 -0.230 -0.450 0.054 0.135
-1 -0.383 -0.750 -0.4184 -1.057
0 -0.732 -1.434 0.037 0.094
1 -0.313 -0.613 -0.774 -1.956 *
2 0.020 0.039 -0.065 -0.164
3 0.502 0.983 0.049 0.124
4 0.168 0.33 0.782 1.976 *
5 -0.298 -0.583 -0.202 -0.510
6 0.107 0.210 -0.291 -0.736
7 -0.195 -0.382 -0.325 -0.822
8 -1.174 -2.300 * 0.436 1.103
9 0.093 0.183 0.664 1.677 *
10 -0.892 -1.747 * 0.126 0.319
11 0.230 0.451 0.326 0.823
12 -0.768 -1.505 -0.560 -1.414
13 -0.074 -0.144 0.589 1.489
14 -0.501 -0.981 -0.114 -0.288
15 -0.231 -0.452 -0.082 -0.208
Note: * denotes statistical significance at the 10% level.
Table 2. Results of CAR on resumptions of Chairman and General
Manager
Window Chairman General Managers
CAR t-test CAR t-test
-15 0.989 1.936 * -0.053 -0.134
-14 0.690 0.956 -0.222 -0.396
-13 0.192 0.217 -0.904 -1.320
-12 0.065 0.064 -1.242 -1.569
-11 -0.199 -0.174 -1.047 -1.184
-10 -0.302 -0.242 -1.197 -1.235
-9 -0.236 -0.174 -1.437 -1.373
-8 -0.223 -0.154 -2.113 -1.888 *
-7 -0.560 -0.365 -2.388 -2.012 *
-6 -1.013 -0.628 -2.668 -2.133 *
-5 -1.042 -0.615 -2.772 -2.112 *
-4 -1.085 -0.613 -3.286 -2.398 *
-3 -0.333 -0.181 -3.405 -2.387 *
-2 -0.563 -0.295 -3.352 -2.264 *
-1 -0.946 -0.479 -3.770 -2.460 *
0 -1.678 -0.822 -3.733 -2.359 *
1 -1.991 -0.946 -4.507 -2.763 *
2 -1.971 -0.910 -4.571 -2.723 *
3 -1.470 -0.661 -4.522 -2.622 *
4 -1.302 -0.570 -3.741 -2.114 *
5 -1.599 -0.684 -3.942 -2.174 *
6 -1.492 -0.623 -1.233 -2.281 *
7 -1.687 -0.689 -1.559 -2.403 *
8 -2.861 -1.144 -1.123 -2.127 *
9 -2.768 -1.084 -3.459 -1.748 *
10 -3.660 -1.406 -3.333 -1.652 *
11 -3.430 -1.293 -3.007 -1.463
12 -4.198 -1.554 -3.567 -1.704 *
13 -4.272 -1.554 -2.977 -1.397
14 -4.772 -1.707 * -3.092 -1.427
15 -3.174 -1.760 * -3.174 -1.441
Note: * denotes statistical significance at the 10% level.
