Last Updated on 10 February, 2024 by Rejaul Karim
“Lame-Duck CEOs,” a research paper by Marc Gabarro, Sebastian Gryglewicz, and Shuo Xia, examines the concerns surrounding protracted CEO successions in which a lame-duck CEO continues to manage the firm for an extended period before a successor is announced.
The study reveals that approximately one-third of CEO successions are protracted, and despite the unfavorable stock price reaction to such announcements, firms led by lame-duck CEOs display strong performance across various measures. In fact, these firms generate an annual four-factor alpha of 9.6% and present positive abnormal returns during earnings announcements.
The researchers delve into potential mechanisms driving the results, noting that they are stronger when internal candidate competition is more intense. Intriguingly, the findings point towards a mispricing of firms with lame-duck CEOs by the market, while also suggesting that protracted successions may not be detrimental to firm value.
Abstract Of Paper
Financial authorities and investors have raised concerns about protracted CEO successions. We document that about a third of CEO successions are protracted, during which a lame-duck CEO continues to run the firm for about six months before a successor is announced. Despite a negative stock price reaction to protracted succession announcements, firms run by lame-duck CEOs perform well on various measures: they generate an annual four-factor alpha of 9.6% and exhibit positive abnormal returns around earnings announcements. Testing different mechanisms, we show that the results are stronger when the competition between internal candidates is more intense. Our findings suggest that the market misprices the value of firms with lame-duck CEOs, but protracted successions are not detrimental to firm value.
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Erasmus University Rotterdam (EUR) – Erasmus School of Economics (ESE)
Halle Institute for Economic Research; University of Leipzig – Faculty of Economics and Management Science
In conclusion, the study “Lame-Duck CEOs” by Marc Gabarro, Sebastian Gryglewicz, and Shuo Xia sheds light on the phenomenon of protracted CEO successions and the concerns it raises among financial authorities and investors.
The research uncovers the often-overlooked positive aspects of firms led by lame-duck CEOs, who tend to outperform on various measures, generating a substantial annual four-factor alpha of 9.6% and positive abnormal returns around earnings announcements.
The analysis of different mechanisms further highlights the crucial role of intensive competition among internal candidates in enhancing the results. Ultimately, the findings of this study challenge the prevailing market perception by demonstrating that the market might misprice firms with lame-duck CEOs and that protracted successions may not necessarily hamper firm value, as previously thought.
Q1: What does the study reveal about firms with protracted CEO successions, specifically those led by lame-duck CEOs?
Despite concerns and negative stock price reactions associated with protracted CEO successions, the study finds that firms led by lame-duck CEOs perform well. These firms demonstrate a remarkable annual four-factor alpha of 9.6% and exhibit positive abnormal returns during earnings announcements.
Q2: Why are lame-duck CEOs able to generate positive performance for their firms, according to the research?
The positive performance of firms with lame-duck CEOs is attributed to potential mispricing by the market. The study suggests that financial markets may undervalue these firms. Additionally, the positive results are more pronounced when there is intense competition among internal candidates to succeed the CEO.
Q3: How prevalent are protracted CEO successions, and what is the typical duration of such successions examined in the study?
The study indicates that approximately one-third of CEO successions are protracted. During these successions, a lame-duck CEO continues to manage the firm for about six months before a successor is officially announced. The research focuses on understanding the dynamics and implications of these relatively extended CEO transition periods.