CEO succession planning disclosure and stock market reactions to CEO turnover announcements

Abstract

Establishing and disclosing a formal, planned, and transparent process of leadership transition well before the announcement of CEO turnover is likely to mitigate investors’ concern about business uncertainty surrounding CEO turnover. Moreover, observing the disclosure of CEO succession planning, investors may form an expectation that a successor will inherit and replicate his or her predecessor’s leadership style and business strategies. Building on these investor expectations, we hypothesize that stock market reactions to the announcements of well-performing CEOs’ departures are incrementally positive when firms previously disclosed CEO succession planning compared to when they did not. We also hypothesize that this relation is more likely to hold for firms with more independent boards or with less entrenched CEOs. Our evidence supports these hypotheses. Our findings suggest that CEO succession planning and disclosure benefit investors in the event of a CEO turnover.