Academic journal article Journal of Small Business Management

The Death of Key Executives in Small Firms Effects on Investor Wealth

Academic journal article Journal of Small Business Management

The Death of Key Executives in Small Firms Effects on Investor Wealth

Article excerpt



Cette etude analyse l'impact sur le marche des valeurs, de ]'announce du di?cbs d'un cadre cle dans une compagnie vendant des actions au comptant. L'enqubte couvre une periode de dix-sept ans, allant de 1966 a 1982. Le enqueteurs ont applique'la methode Temps/ Evement mise au point par Fama, Fisher, Jensen et Roll. Les resultats montrent une reaction tr. Ls negative du marche.

Recently, there have been calls' to redirect research on turnover to focus on the consequences of individuals leaving organizations and also to establish closer working relationships between management and financial researchers.

One way to respond to these calls is to examine the effects of management turnover through key executives' deaths on investor wealth using the financial analysis tool of event time methodology. This method is relatively new to the study of turnover in organizations, but is especially suitable because the death of a key executive is usually an unanticipated event. As Beatty and Zaiac have noted, it is usually the case that, "inferring the reason for a CEO change is fraught with uncertainty, given that public announcements are often highly ambiguous or even totally uninformative."

To date, only two such interdisciplinary turnover investigations have been published.' Both involved large firms whose stock traded on the New York or American Stock Exchanges. Both studies reported that top executive death had little influence on the market for the population studied as a whole. They found, however, significant subsample differences. Johnson et al. reported that sudden senior corporate executive deaths had little systematic impact on stock returns, but founder death was associated with positive returns. This contrasts with Worrell et al., who found both sudden deaths of CEOs and founder status to be associated with negative returns. In addition, they also reported that, unlike this negative reaction to the announced deaths of the hands-on CEOs, the market reacted positively to the announcement of the deaths of corporate chairpersons.


The present study examines issues similar to those in Johnson et al. (1985) and Worrell et al. (1986), but it concentrates on turnover in smaller companies. Specifically, we examined the reaction of the stock market to the deaths of key executives( CEOs and/or chairmen) in companies whose stock trades over-the-counter (O.T.C.).

Smaller firms tend to have less division of labor than large firms, resulting in more reliance on the skills of a single key manager. For example, Vancil notes that the "solo mode" of top management organization is more common in smaller companies. Responsibility for major decision making typically lies with the solo key executive. This concentration of authority may mean that the small firm has no "heir apparent" with wide general management experience. The death of a key individual in a small firm may thus cause greater disrupfion in the firm's operation than a similar occurrence in a large firm.

Relatively little research has been performed on the financial consequences of turnover following key executive death. That which has been done dealt with large organizations and yielded conflicting results. The present study, therefore, must be considered exploratory. However, given (1) Price's observation "that turnover generally has a basically negative impact on effectiveness"; (2) Staw's proposition that the higher the level of the position to be filled, the greater the potential for disruption; and (3) the notion that a change in leadership in small firms may have as great (or greater) an impact as in large firms, it is possible to hypothesize that the death of a CEO or corporate chairman will have a negative impact on the stock prices of firms whose stock trades O. …

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