The Importance of Board Quality in the Event of a CEO Death

Authors


  • We thank participants at the Eastern Finance Association and Financial Management Association meetings, Jayant Kale, Melissa Frye, Robert Parrino, an anonymous reviewer, and Cynthia J. Campbell (editor) for their valuable comments. All errors are the responsibility of the authors.

* Corresponding author: Department of Finance, Richard T. Farmer School of Business, 120 Upham Hall, Oxford, OH 45056; Phone: (513) 529-5986; Fax: (513) 529-8598; E-mail: harmanys@muohio.edu

Abstract

We examine board quality and executive replacement decisions around deaths of senior executives. Stock price reactions to executive deaths are positively related to board independence. Controlling for such factors as the deceased's stockholdings, outside blockholdings, board size, and whether the deceased was a founder, board independence is the most significant factor explaining abnormal returns. Board independence is particularly important when there is no apparent successor and firm performance is poor. The results are consistent with independent boards being reluctant to discipline poorly performing incumbent managers, but nevertheless using the opportunity of an executive death to improve the quality of management.

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