Does earnings response following CEO turnovers depend on successor origin?: A study on post-turnover earnings response coefficients in North America

Sammanfattning: A change in CEO represents a significant event in the life of a firm and can have a large impact on its subsequent direction and performance. This study investigates the effect of CEO turnover on the stock market's response to earnings announcements. Previous research has shown that earnings response coefficients (ERCs) increase following turnovers (Clayton et al., 2005). We extend this research by showing that the size of post-turnover ERCs depend on successor origin. The market response to the first quarterly earnings announcement following a CEO change is larger after outside successions compared to inside successions. This finding is statistically significant. We also show that the difference in ERCs between the successor types declines with the number of earnings announcements following the turnover. Our results can be explained by the greater information asymmetries associated with outside successions compared to inside successions. The market is assumed to be more uncertain about the new CEO's ability and the firm's future strategy following outside successions.