Abstract
We investigate market reactions to announcements of CEO turnovers and find that forced turnovers are not accompanied with positive returns, which contradicts the broad view that firing a CEO sends a positive signal to the market. We explore this contradiction by focusing on the nature of not only turnover but also the past firm performance itself. We find that the market seems to incorporate both types of information in reacting to CEO turnover announcements. Firing an underperforming CEO is seen as a positive signal whereas firing an outperforming CEO is viewed as a negative signal. Outperforming CEOs appear to be fired due to internal conflicts rather than early actions against performance deterioration. We also search for reasons behind the decision to fire a CEO from different news databases and find that giving no reason for the CEO departure increases uncertainty in the market causing a negative market reaction, whereas setting performance as the reason for the departure assures investors about the future trajectory of the firm resulting in a positive market reaction.
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