STOCK MARKET REACTION TO THE CESSATION AND APPOINTMENT OF CHIEF FINANCIAL OFFICERS (CFOS)

Abstract

In recent years, there has been growing attention on the important role played by the Chief Financial Officer (CFO) in shareholder wealth creation and corporate governance. Yet, there are very few studies on the impact of changes in CFOs on the stock price or performance of companies. This study examines the reaction of the stock market to the cessation and appointment of CFOs. In terms of CFO cessations, I investigate whether the market reaction is conditional on anticipation of the cessation, pre-succession performance of the firm, gender, tenure and frequency of CFO changes. In terms of CFO appointments, I examine whether the market reaction is conditional on origin, prior experience as a CFO, gender and pre-succession performance of the firm. The data is based on a sample of 127 and 133 non-contaminated pure cessation and pure appointment announcements of CFOs, respectively, for Singapore Exchange (SGX) listed companies over the period from January 2009 to December 2011. Unlike other exchanges, SGX requires companies to immediately announce the cessation and appointment of CFOs and to provide detailed information about the CFO, providing a unique setting for a study of CFO changes. There are five significant findings. First, when firms make CFO cessation announcements, there is an inverse relation between pre-succession performance and the stock market reaction. Second, the market reacts negatively to the cessation of CFOs with long tenures. Third, the market reacts negatively to CFO cessation announcements made by firms with frequent CFO changes. Fourth, the market welcomes the appointment of CFOs with prior experience as CFOs. Lastly, the market reacts positively to the appointment of insiders as CFOs.