Stock market reaction to CEO certification: the signaling role of CEO background
Article first published online: 27 APR 2009
Copyright © 2009 John Wiley & Sons, Ltd.
Strategic Management Journal
Volume 30, Issue 7, pages 693–710, July 2009
How to Cite
Zhang, Y. and Wiersema, M. F. (2009), Stock market reaction to CEO certification: the signaling role of CEO background. Strat. Mgmt. J., 30: 693–710. doi: 10.1002/smj.772
- Issue published online: 27 APR 2009
- Article first published online: 27 APR 2009
- Manuscript Revised: 25 FEB 2009
- Manuscript Received: 4 JUN 2006
- CEO certification;
- CEO credibility;
- upper echelons;
- Sarbanes-Oxley Act
As a direct result of the corporate scandals that started with Enron and led to general unrest in the financial markets, the Securities and Exchange Commission required chief executive officers (CEOs) and chief financial officers of large publicly traded companies to certify their financial statements. Using market signaling theory, we propose that attributes of the CEO send important signals to the investment community as to the credibility of the CEO certification and thus the quality of the firm's financial statements, which in turn impact the stock market reaction to the CEO certification. We find that a CEO's shareholdings and external directorships are positively related to the abnormal returns of CEO certification. Further, the stock market penalizes a firm with a CEO who is associated with the firm's prior financial restatement and rewards a firm with a CEO who is appointed after the firm's prior financial restatement. Copyright © 2009 John Wiley & Sons, Ltd.