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When an Executive Departs: An Informational Content Story
Abstract
Information about an executive's decisions at his/her former employer can have a significant impact on the stock returns of his/her current employer, even after the job change occurs. In this article, we analyze transfers of information, which, we argue, reflect executive decision‐making ability as executives change jobs. We examine information about restructurings and write‐downs at the new employer emerging after the executive has left an employer that indicates the executive is of lower ability than investors had expected at the time of the hiring. Our results show that such signals are associated with significant negative returns to the current employer's shares, particularly for within‐industry job changes. We distinguish between restructurings at firms with and without departing executives and find that following an executive's departure, firms that had executives depart experience negative market reactions.
... Second, the negative impact of CEO turnover on the firm is compounded when other members of the top management team leave the firm with the CEO. This suggests an informational asymmetry aspect in the behaviour of these insiders (Nam, Ronen, and Ronen 2017). In case the top management team (TMT) shares in the escalation-biased decision-making, evidence of de-escalation is likely to be more pronounced when a CEO departure is accompanied by the departure of other members of the TMT. ...
We explore how de-escalation of commitment is linked to top management turnover and economic changes at the firm. Escalation of commitment occurs when managers continue investment in a project after receiving negative information. A major determinant of escalation is the personal responsibility effect in that managers are more likely to escalate commitment to a failing project if they were responsible for the original investments. Prior studies suggest that a change in top management facilitates de-escalation of commitment as incoming managers who do not have such commitment are able to stop investments that are discovered to be failing. Our empirical analysis based on a sample of over 3,300 firms for the period from 1992 to 2016 demonstrates the link between specific top management turnover types and economic changes at the firm consistent with the de-escalation of commitment.
... Thus, financial reports may be less informative about the value contribution of an executive as compared with the value generated by its tangible and intangible assets. Some information about a manager's talent could remain unknown during her entire employment (Nam et al. 2018). ...
We study a model in which financial reports are used in labor markets to learn about managerial talent. A manager manipulates reports to influence the labor market assessment of his talent. If investors are uncertain about the manager’s incentives, manipulation introduces noise into the report and reduces its usefulness for the capital market. We consider price informativeness and expected reporting bias as measures of capital market efficiency and develop novel empirical predictions. We show that higher uncertainty about the manager’s contribution to firm value can decrease price informativeness and earnings response coefficients. Intuitively, supplemental disclosures about
managerial talent can mitigate the detrimental consequences of uncertain labor market incentives. Perhaps surprisingly, we show that the usefulness of such supplemental disclosures may increase in their susceptibility to manipulation.
While previous research suggests that CEO turnover correlates with strategic changes in firm's operations such as discontinuation of operations, we demonstrate that such findings apply only to specific types of CEO turnover, and only if non-CEO members of the top management team also exit the firm. Our analysis examines cases of contender, follower, and outsider succession and reinforces the key role of non-CEO departures in strategic change at a firm. The results support an integration of the upper echelons perspective and the power circulation theory view of top management team turnover.
We find, like [Lang, L.H.P., Stulz, R.M., 1992. Contagion and competitive intra-industry effects of bankruptcy announcements: An empirical analysis, Journal of Financial Economics, 32(1), 45-60], that large firm bankruptcies generate a dominant contagion effect. A value-weighted portfolio of competitors' stocks experiences a significant loss of 0.56% in the three days centered around the Chapter 11 announcement. This represents an average loss of $3.32 for all the competitors combined for every dollar lost by the bankrupt firm. In addition, we find that small firm bankruptcies also generate a dominant contagion effect among smaller sized competitors; an equally-weighted portfolio of all competitors has a significant 0.12% drop. In a new approach to separate the contagion and competitive effects, we compare the stock price reactions of competitors who themselves subsequently file for bankruptcy in the next three years (candidates for contagion effect) with those who do not do so (candidates for competitive effect). As expected, candidates for contagion effect experience a significant, negative three-day stock price reaction of -4.68%. However, contrary to expectations, candidates for competitive effect also have a significant, negative return (-0.49%), suggesting that the competitive effect is weak at best since it is dominated by the contagion effect even in this sample. Other procedures to identify candidates for competitive effect generally yield similar findings. Finally, we analyze competitors' stock price reactions based on selected characteristics (e.g., industry concentration, and leverage), with similar results as before. One explanation for the failure to detect a competitive effect is that the impact may already have been incorporated in stock prices prior to the filing for Chapter 11. Consistent with this explanation, we find significant positive stock price reactions by competitor stocks for the hundred days prior to the bankruptcy announcement.
This paper examines the relation between management turnover and divestitures of recently acquired divisions. The empirical results indicate that at the time of a management change, there is an increased probability of divesting an acquisition at a loss or one considered unprofitable by the press. The probability increases by about the same amount regardless of whether the change is an apparent age-65 retirement or a resignation. Overall, the results are consistent with a variety of agency-based theories of corporate investment and suggest that management changes are important events for corporations because they lead to reversals of poor prior decisions.
This paper examines the benefits from communications made at corporate presentations to securities analysts. We examine whether firms benefit by increasing analyst following or by correcting mispricing, and whether analysts gain by acquiring information that improves the frequency or quality of their forecasts. The results show significant increases in analyst following, and significantly positive abnormal returns on the presentation date, with larger reactions observed for underpriced securities. Finally, although we find an increase in forecasting activity following the presentations, we find no evidence that analysts' post-presentation forecasts are less disperse, more accurate or less biased than their pre-presentation forecasts.
We study the economic determinants of the information externality suppliers experience at the time of their customers’ quarterly earnings announcements (QEAs). We measure the information externality as suppliers’ stock price reaction to their customers’ QEAs. We expect information externalities to arise because the information revealed in customers’ QEAs can revise investors’ expectations about the level of suppliers’ future earnings and cash flows, and or because it resolves uncertainty about those future earnings and cash flows. We find that the information externality experienced by suppliers is increasing in the: (1) magnitude of the new information disclosed at customers’ QEAs; (2) strength of the economic bond between the firms, (3) components of the earnings information disclosed by a customer, (4) level of macroeconomic uncertainty prevailing at the time of customers’ QEAs; and decreasing in suppliers’ earnings persistence. We also find that the information contained in customers’ QEAs leads to both a revision in beliefs about the level of suppliers’ future earnings, as well as to a resolution of uncertainty about such earnings. Our study adds to the literature which seeks to understand the economic factors that lead to cross-sectional differences in earnings informativeness. However, unlike prior studies which have focused on examining the factors that determine “own-firm” stock price reactions to earnings, we identify the economic factors that lead to cross-sectional differences in the informativeness of one firm’s earnings (e.g., a customer’s) to investors of a another, non-announcing firm (e.g., a supplier). Our study also extends prior research by documenting that information externalities are not limited to firms in the same industry but also extend to firms in the supply chain.
This paper documents a strong positive relation between the percentage of outside directors and the frequency of outside CEO succession. The likelihood that an executive from outside the firm is appointed CEO increases monotonically with the percentage of outside directors. This monotonic relation is observed for both voluntary and forced departures. Evidence from stock returns around succession announcements indicates that, on average, shareholders benefit from outside appointments, but are harmed when an insider replaces a fired CEO.
Is it plausible that important corporate events such as write-offs, averaging around 20% of firms' market values, are associated with stock-price responses of less than 1%? We investigate this question by observing a lengthy period before and after the announcement date. We find, as suggested by previous studies, that price declines precede write-off announcements. We find what has not been found before: abnormal returns continue to decline after the announcement by as much as 21% annually for a two-year period. This significant stock-price underperformance is also observed around subsequent earnings announcements, and is robust to various risk-adjustment techniques. Our findings are important on two counts: they (1) suggest that disclosure standards may not be sufficient to allow market agents to understand the economic consequences of the write-offs, and (2) reveal a substantial mispricing, which is inconsistent with market efficiency.
This paper investigates the extent of intra-industry information transfers associated with the half-yearly earnings announcements of a sample of Australian firms. The ‘omitted factor’ interpretation of Foster's (1981) results is examined using a recursive systems specification of the return generating process to model extra-market return covariation in cross-section. Although some aspects of the results do appear sensitive to the alternative methodologies, the overall conclusion is consistent with Foster (1981) and supports the existence of intra-industry information transfers associated with firms' earnings releases.
Consistent with an information-signaling perspective, negative and statistically significant announcement effects are associated with bank loan-loss reserve (LLR) announcements over the 1985–1990 period. Announcement effects differ between money-center and regional banks and also according to the nature of contemporaneous earnings and dividend disclosures. Moreover Information transfer or ‘contagion’ effects are present in that LLR announcements by regional banks decrease the value of both money-center banks and nonannouncing regional banks. These statistically significant contagion effects suggest a link between the asset quality characteristics of money-center and regional bank loan portfolios.
We assess potential information transfers by examining the association between the earnings announcements of early and late announcers in an industry. Our earnings prediction models are statistically significant much more frequently than would be expected by chance. The models suggest potential positive information transfers on average, but there is substantial cross-industry variation in the strength of this relation. We find that the greatest price reactions by nonannouncers to same-industry earnings announcements occur in industries with the greatest earnings comovement
This paper investigates the effect of bankruptcy announcements on the equity value of the bankrupt firm's competitors. On average, bankruptcy announcements decrease the value of a value-weighted portfolio of competitors by 1%. This negative effect is significantly larger for highly levered industries and industries where the unconditional stock returns of the nonbankrupt and bankrupt firms are highly correlated; the effect is significantly positive for highly concentrated industries with low leverage, suggesting that in such industries competitors benefit from the difficulties of the bankrupt firm.
Previous empirical research has established that dividend changes are associated with significant abnormal returns. This association is rationalized on the basis that the dividend announcement acts as a signal of future earnings. Another body of research has documented the existence of intra-industry transfers of information where news about one firm is extrapolated to other companies in the same industry. Earnings information transfers have been found to be positive in nature, with good news about one company leading to stock price increases for rival firms. Linking dividend signaling and information transfer, tests were constructed to ascertain whether the dividend change of one firm is associated with the stock price performance of other companies in the same industry. The results indicate there is some small positive information transfer. The magnitude of information transfer is related to the degree of the dividend surprise, the recent dividend history of the other companies, and correlations in stock returns between the dividend announcer and the other companies. Information transfer is found to affect earnings and earnings growth estimates of the other firms and this leads to revisions in their stock prices.
Recent studies argue that the spread-adjusted Taylor rule (STR), which includes a response to the credit spread, replicates monetary policy in the United State. We show (1) STR is a theoretically optimal monetary policy under heterogeneous loan interest rate contracts in both discretionay and commitment monetary policies, (2) however, the optimal response to the credit spread is ambiguous given the financial market structure in theoretically derived STR, and (3) there, a commitment policy is effective in narrowing the credit spread when the central bank hits the zero lower bound constraint of the policy rate.
L'int�r�t de l'approche par les jeux globaux ("global games'') est pr�cis�ment d'ancrer les anticipations sur des variables exog�nes r�elles. On peut ainsi garder l'aspect auto-r�alisateur des anticipations mais en restaurant l'unicit� de l'�quilibre et donc un meilleur pouvoir pr�dictif du mod�le. Nous illustrons ces m�canismes sur deux exemples. Le premier a trait au choix r�sidentiel d'agents qui ont une pr�f�rence "identitaire''. Le second a trait � la contagion de paniques bancaires d'un pays � un autre. De mani�re plus g�n�rale, tous les jeux qui pr�sentent des compl�mentarit�s strat�giques sont susceptibles d'�tre analys�s au moyen des techniques des "global games''. Il convient toutefois de rappeler que les techniques utilis�es demeurent assez sp�cifiques: l'incertitude strat�gique porte essentiellement sur les croyances de premier degr� des autres acteurs. Or, si de mani�re plus g�n�rale on suppose que cette incertitude peut porter sur des ordres plus �lev�s, les conclusions des mod�les peuvent changer. Ainsi, Weinstein et Yildiz (2004) montrent que dans un oligopole de Cournot, il y a une tr�s grande multiplicit� d'�quilibres si on suppose que l'incertitude porte sur les croyances de niveaux suffisamment �lev�s.
In this article I examine the response of investors and analysts of nonannouncing firms to the earnings report of the first announcers in the industry. The error in the earnings forecast of the first announcer is found to be informative about the errors in the contemporaneous earnings forecasts of subsequent announcers in the industry. However, investors and analysts do not appear to fully incorporate the information from the first announcers’ news in their revised earnings expectations for subsequent announcers. This apparent underreaction to the first announcers’ news leads to predictable stock returns for subsequent announcers in the days following the first announcement. Results of this study can be seen as further evidence of investor and analyst underreaction to publicly available information.
Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market "beta", size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in "beta" that is unrelated to size, t he relation between market "beta" and average return is flat, even when "beta" is the only explanatory variable. Copyright 1992 by American Finance Association.
This paper examines the stock market reaction to write-off announcements. The increasing prevalence of write-offs over the last decade has lead the Financial Accounting Standards Board to issue new guidelines on the accounting for write-offs, and there has been much discussion about the stock market reaction to these types of announcements. By focusing on the expected cash flow implications of the different types of write-off announcements, this paper documents that the stock price reaction to write-off announcements is associated with the expected cash flow implications of the events surrounding the write-off. Copyright Blackwell Publishers Ltd 1997.
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