Stock Market Reactions to the Announcement of CEO Succession in Family firms

Abstract

Although previous studies have examined that firms audience take a large part in determining firms economic and social performance, we know very little about investor community of family firms. Building on principal-principal conflict of agency theory and on signaling theory, we found that investors in stock market react to the announcement of family CEO succession more negatively than to that of professional CEO succession in family firms. Their negative reactions of family CEO succession decrease when the firm has higher reputation, which signals the efficient governance structure of the firm. Our findings exhibit that investors perceive family CEO appointments as another governance mechanism that enhances information asymmetry among two different principals of family firms. The present research emphasizes the practical importance of how nonfamily stakeholders evaluate the family firms leadership, and motivates scholars to figure out how family firms could interplay with their audience. We constructed CEO succession event dataset of the listed family firms in South Korea and employed event study to observe stock market reactions at the time of announcements. To eliminate endogeneity issue, we used diverse approach including constructing the matching sample and classifying the types of leadership changes that could be observed in family firms.