Corporate senior management play an important role in determining the future success of their organisation. In forecasting future earnings of a firm and determining an expected return on investment, the investment community is therefore concerned with the composition of this management team. Any change in the set of individuals holding the senior positions of Chief Executive Officer, Managing Director, Chairman of the Board and Chief Financial Officer or Finance Director is expected to be considered a major event for the company and to lead to a reassessment of the firm's potential earnings stream by investors.
This paper examines the relationship between the announcements of senior management changes and the firm's share price performance for companies listed on the Australian Stock Exchange. It is hypothesised that the announcement of such a change will lead to abnormal share price performance. The study does not attempt to differentiate firms with a sound operational history, where the stock market reaction may be expected to be negative, from those with a poor earnings background, where the market's reaction to a management change may be considered positively. This represents a significant avenue for further research.
It is further hypothesised that an announcement of a management change will lead to increased trading volume activity, indicating that investors are not only reassessing their investment in the firm but acting upon this re-evaluation.
A sample of 100 announcements is obtained from the broader sample of announcements of management changes identified between July 1994 and December 1995. The results indicate that the share price performance of this sample of firms prior to the announcement is in a significantly negative trend. The abnormal return identified on the announcement date is negative, although the post-announcement period is characterised by flat to slightly positive abnormal share price performance. Some differences exist in the reactions to the various positions included in the study. Reactions to changes in the positions of Chief Executive Officer and Chairman of the Board largely reflect the reaction to the aggregate sample. However, the share market appears to react more positively toward changes in the position of Managing Director and less positively to changes in the position of ChiefFinancial Officer or Finance Director.
No evidence is found of increased trading activity in the period surrounding an announcement of a change in the senior management personnel.
As an introductory study into the relationship between announcements of senior management changes and share price performance, this paper highlights some interesting results. Several avenues for further research and extensions of this study are identified. It is hoped that this study encourages such further work into the relationship between investors and corporate management.