The Effect of Announcement of Chief Executive Officers Changes on Stock Returns of Firms Listed at Nairobi Securities Exchange

Abstract

The study sought to analyse the effects of announcement of top management changes on share prices with focus to selected firms listed on Nairobi Securities Exchange. The specific objectives of the study were to find out the impact of share price performance at the date of announcement of a CEO change, to determine the impact of share price performance for the three years subsequent to the change in CEO, to established whether the reaction of the stock market to internal versus external successors differs and to assess whether the stated reason for the CEO change has an impact on the stock market reaction at the date of the announcement. The study was of great benefit to the management of listed companies in the NSE, the stakeholders including policy makers, the future researchers and to the existing body of literature concerning effects of announcement of top management changes on share prices. The study adopted, Agency Theory, Stewardship Theory, Stakeholder Theory and Resource Dependency Theory to assist in understanding the announcement of top management changes on share prices. Descriptive research design was used. Target population in the study included selected companies listed at the Nairobi Securities Exchange. The study selected only firms that have changed their top management in the period between 2009 and 2015. The study sought to determine the announcement of changes in top management on the shares price before and after the exit of the CEOs. The study used secondary sources of data. Data collected was analysed using quantitative and qualitative method. A Standard event study methodology model was used to determine the announcement of top management changes on share prices with focus to selected firms listed on Nairobi Securities Exchange. The research observed a statistically significant negative impact on share prices at the date of announcement of CEO turnover, but this was negated by statistically significant positive returns when looking at the day prior to the announcement. No statistically significant results were observed for internal versus external CEO replacement. Forced CEO turnover had a negative effect on share price performance when compare to voluntary turnover, but this was not statistically significant. No significant results were observed for the seven years’ post the appointment of the new CEO. The conclusion of the research is that the impact of CEO turnover is not significant at announcement date or over time.