The Effect Of Announcement Of Top Management Changes On Share Returns Of Firms Listed At Nairobi Securities Exchange

Abstract

Economic theory states that top management change can only be effective where the company shares are performing poorly, hence changing the management in such a case may be a good idea but it castigates changing the top management when the firm registers superior share performance. The theory is of the view that ultimately poorly performing firm that change their management record improved stock performance. The main aim of the study was to investigate the effect of announcement of top management changes on share returns of firms listed at the Nairobi Securities Exchange, focussing specifically on the CEO change event. The study also examined the impact of forced versus voluntary CEO turnover, as well as internal versus external CEO replacement. The period for the study was 2008 to 2016. The study obtained data from the NSE, respective websites of the firms and from financial articles. Data was being inputted into (SPSS 21) and examined using descriptive and factorial analysis. Standard event methodology was applied in data analysis. An event window of 11 days was used. The researcher also used a 3 year event window to test for the impact of CEO turnover; three years post the turnover event. The study found that the share prices were impacted negatively and to a significant extent at the date of announcement of CEO departure. However, this was negated by the significant positive abnormal returns on the day prior to the announcement. Also, for the internal vs external CEO replacement the returns were found to be non-statistically significant. Share returns were also found to be more negatively influenced by forced CEOs departure than the voluntary CEO departures. However, the impact was non-statistically significant. For the 3 years post the CEO turnover event, the impact on share returns was found not to be significant.The result findings showed that the impact of CEO turnover on the performance of a business, although negative, is weak and therefore recommends that proper CEO selection criteria should be used to ensure that firms appoint CEOs who are best suited to solve the challenges of the organization and to steer it into growth. The researcher also recommends that listed firms should review their policies on CEO tenure and turnover and align them to the interests of the shareholders.