“CEO turnover, leadership vacuum, and stock market reactions” by Professor Chul W. Park
Professor Chul W. Park
Professor of Accounting
School of Business
The University of Hong Kong
CEO departures without a named successor create a leadership vacuum giving rise to operational disruption and strategic uncertainty, as well as a turnaround benefit from early exit of a poorly performing CEO. In contrast, CEO departures accompanied by a successor appointment indicate a planned, smooth leadership transition. This paper investigates how market reactions to CEO departure announcements without successor appointment reflect the costs and benefits of a leadership vacuum. After controlling for a positive self-selection effect capturing the turnaround benefits that may motivate board selection of a leadership vacuum, we find a significant mean difference between stock market reactions to CEO departure announcements with and without successor appointment, suggesting that a leadership vacuum causes incrementally significant switching costs relative to those caused by a smooth leadership transition. This finding implies that effective succession planning can prevent a costly leadership vacuum by ensuring the availability of a qualified successor at CEO departure.