AFFECT ON STOCK RETURN

Affect on Stock Returns by the change of CEO



Executive Summary

The aim of this paper is to analyze the effect of the stock returns of the companies, which have appointed new CEOs in the last five years. The thirty companies with new CEOs were selected form S&P 500. This research investigates whether the financial data of those companies especially the stock returns and then calculates the abnormal returns, and further identifies the mean and standard deviation of the portfolio to draw a conclusion.

Effect on Stock Returns by the change of CEO

Introduction

Every day we hear news of some companies that are performing very well while some are not. We have good examples of even hundred year old companies still performing efficiently and effectively even after the founder of the company died decades ago. This performance of the organizations depends on the effective leadership and decision making capability of the Chief Executive Officer (CEO). CEOs with broad knowledge of the industry and having leadership skills are the winner in this competitive market while CEOs lacking these basic qualities can ruin the well performing business. The paradigm of efficiency has been challenged in recent decades due to obtaining abnormal returns, statistically and economically significant in journalistic large periods of time after some crucial business decisions. However, the conceptual and presents statistical measurement and comparison of long-term abnormal returns has meant that the evidence be described as an anomaly pass (Browning and Sidel, 2007).

There is a limited spread of this type of study and the less research work exists on this subject matter. On the basis of this concept, the purpose of this paper is to analyze the stock performance of the thirty companies with new CEOs appointed in the last five years. The study is based on the stock returns of the companies after new CEOs took the charge. The abnormal returns are calculated for each company and then analyzed for further research. Abnormal returns calculated as the difference between actual and expected returns for a period of days before and after the announcement date of the event (Abarbanell and Bushee, 1998). The standard deviation is also calculated of the portfolio of thirty companies after the mean is identified. This research tests whether or not the change of CEO affects the stock returns of the company. Sample Selection and Data Collection

The sample size of this research is thirty listed companies which are selected from S&P 500. The criterion of the sample selection was based on the appointment of new CEO in the past five years. The selection was independent of size and profitability of the company. The companies selected are of diversified industry sectors including online services, computer manufacturing, telecommunications, food services, apparel, footwear, sportswear, retailers, banks and other financial institutions (see appendix A for the list of the selected companies). The data to be analyzed is the stock performance of the company that is the expected returns and actual returns. The data was collected in the form of ...