The Relationship Between Chairmanship and Ceo Changes and Stock Return of the Manufacturing Companies Listed in the Nairobi Securities Exchange
Abstract
Directorship in any organization determines the direction that the company takes which
affect its profitability and general operations. When directors change in an organization
the company shares at the stock market responds either positively and negatively. Change
in directorship can have positive and negative effects on the performance of an
organization, Effective directors can use their experience to make a substantial difference
at both levels, but they only have the time to get involved in those few decisions to which
they can make a significant contribution (Palmberg, 2010). The study sought to establish
the relationship between CEO and chairmanship changes and stock performance of the
manufacturing companies listed in the Nairobi Securities Exchange.
The researcher used an event study research design to determine the effects of change of
CEO and chairmanship on the financial performance of an organization. The study
focused on the population universe which was all the manufacturing companies listed on
the Nairobi Securities Exchange that had announced CEO and chairmanship change
during the calendar years 2000 to 2012. The study was a census and therefore looked at
all the manufacturing companies listed in Nairobi Stock Exchange. Secondary data was
used to determine the effects of change of directorship on the stock performance of an
organization in the NSE. Regression analyses were used to reinforce the results. It
analyzed the rate of return on security and the rate of return on the market index in period
of the listed manufacturing firms.
Positive abnormal performance is detected following change of CEO, but is not
concentrated in or confined to the days immediately following change. The study found
that there was abnormal negative performance prior to change in CEO. The study found
that there was abnormal positive performance after change in CEO. The year before
change there is significant negative abnormal performance. The study found that there
was no abnormal performance after change in chairmanship. There exists a significant
relationship between return on security and return on stock before and after CEO change.
Specifically, before the CEO change event, low prior performance triggers higher
turnover (but high prior performance does not affect CEO change). There is a positive
significant relationship between return on security and return on stock after CEO change.
The shareholders invest heavily in the firms having higher Corporate Governance
provisions as these firms create value for them. The study recommends that effective
CEO be put in place. To turn around underperforming firms, the board needs to hire an
outsider CEO instead of a corporate insider. Listed companies’ boards’ should plan a
succession strategy of the CEO. This will help to avoid negative effect on stock
performance.
Citation
Masters Of Science In Finance, University Of Nairobi, 2013Publisher
University of Nairobi Department Of Finance And Accounting University Of Nairobi