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Does the stock market and job market evaluate a CEO based on the performance of his/her previous employer? We answer this question by examining a sample of 48 CEOs who voluntarily resigned from old firms to obtain similar positions with new firms. Using a sample of CEOs that voluntarily resigned from S&P 500 firms during 2004–2012, we find that the stock market’s reactions to announcements of them resigning from old firms and being hired by new firms depend on how well the old firms had performed. The market is able to differentiate a Bbetter^ CEO from a Bgood^ one by reacting more negatively when the former resigns and more positively when the former is hired by a new firm. Long-term performances of the firms that hire these executives are consistent with market expectations: the firms that hire the betterperforming group are rewarded with significantly better long-term returns than the firms that hire the good-performing executives. It appears that the job market is at par with the stock market— the better group finds jobs much faster than the good group. We also find that better CEOs are more likely than good ones to have a Master’s (or higher) degree.
4 Summary & conclusions
Do the stock market and job market measure a CEO’s ability based on the performance of the employing firm? If the answer yes, we would expect the market to react to the CEO’s departure from the old firm and appointment with a new firm in the following manner: a) negative market reactions would be higher when a CEO of higher ability departs than when a CEO of lower ability departs, and b) positive market reaction would be higher when the former is hired than when the latter is hired. If the job market assesses the ability of a CEO the same way as the stock market, we would expect the CEO with higher ability would find the next executive job sooner and command a higher salary than his lower ability counterpart. In this paper, we test these predictions. In addition, we explore if there is any measurable and observable attribute that might contribute to an executive’s level of success.
We select from S&P500 during 2004–2012 the firms that fired their CEOs and the firms that lost their CEOs via resignations. Our sample consists of 48 CEOs who voluntarily resigned to find a new job. We provide evidence to indicate that the stock market relates the performance of the employing firm to the ability of its CEO. The market assigns higher negative abnormal returns to departure of a higher-ability executive than to the departure of a lower-ability CEO. The abnormal returns are significantly higher for the hiring of first group than of the second one. The executives have not disappointed the market: the firms that hired the better-performing group are rewarded with significantly better long-term returns than the firms that hire the goodperforming executives.
Additionally, we find that the job market reactions are consistent with stock market reactions: Tier-1 CEOs find new jobs significantly faster than Tier-2 CEOs. Finally, the level of education is an important factor that separates Tier-1 CEOs from Tier-2 CEOs: the former group is more educated (a Master’s degree or better) than Tier-2 CEOs.