The impact of chief executive officer change on company value: evidence from the Nairobi securities exchange

Abstract

Past international studies on the effect of CEO turnover on a firm's share price performance have yielded inconsistent results. To establish the nature and magnitude of the relationship between the two variables in Kenya, this research was conducted, with a particular emphasis on NSE listed companies. The study used the Event Study methodology by looking at whether or not, Cumulative Abnormal Returns (CAR) around the date of the announcement of CEO change in Kenya were significant. Using the standard event study methodology, the study found that CEO turnover has indeed had an impact on actual stock performance in Kenya.

From the study findings it became apparent that company CEO exit announcements have had an impact on firm stock price in Kenya. The impact was however found to be varied, depending on the time period between the pre- and post-exit announcement date. From the analysis, it was established that there has been a significant negative reaction to such a three (3, to four (4, months before the exit date announcement. By the time it is two (2) months to the announcement date of CEO exit, all the way to five (5) months after the appointment of the new CEO, the reaction was found to be positive and significant. The study also found that in the period between 5 and 12 months prior to the announcement date and that from 6 months and beyond after the announcement date, investors' reaction was insignificant.

Using the standard event study methodology, the study found that CEO turnover has had an impact on actual stock performance in Kenya. This study which addressed shareholder wealth changes around the announcement of a CEO turnover in Kenya and found that a significant change in the volatility of the stock-price process around a change in firm leadership exists in the country. The volatility changes that follow a CEO turnover were therefore found to have a significant impact on the firm, and listed companies' boards should plan a succession strategy taking these effects into account.