Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

CEO's fate in hands of external constituents

30.09.2010
Investment analysts influence CEO dismissal

A CEO's fate might be in the hands of external constituents, according to a new study from Rice University's Jones Graduate School of Business. The study found that investment analysts and their negative stock ratings can sway a board to dismiss its CEO.

Conventional research has focused on internal factors that contribute to CEO dismissal -- poor firm performance and organization power and politics. But the new study, published by the Strategic Management Journal, turned its attention outward to discover the significant influence investment analysts have on a board of directors' decision on CEO dismissal versus retention.

The study, conducted by Rice's Yan Anthea Zhang with Margarethe Wiersema at the University of California at Irvine, is the first to provide evidence that investment analysts' stock recommendations can influence boards' evaluations of CEOs and decisions on their dismissal.

"As legitimate third-party evaluators of the firm and its leadership, investment analysts provide certification as to the CEO's ability, or lack thereof," said Zhang, Jones School Distinguished Associate Professor of Management. "Most of the boards' assessments of CEOs involve qualitative judgments characterized by uncertainty, so stock ratings of investment analysts help reduce the ambiguity in the evaluation process.

"In addition, investment analysts' stock recommendations are consequential to investors' decisions. Given that a public company is dependent upon the financial markets for access to capital, the board is likely to be aware of and respond to analyst recommendations when they are negative," she said.

For the study, "CEO Dismissal: The Role of Investment Analysts," Wiersema and Zhang used panel data on the S&P 500 companies from 2000 to 2005, a time period in which concerns over shareholder wealth maximization and CEO accountability generated significant pressures and constraints on companies.

They found that negative stock recommendations (lower levels of average analyst ratings, downgrading of the stock and a larger percentage of sell recommendations) resulted in a higher probability of CEO dismissal. The impact of negative stock recommendations was particularly stronger when the firm's prior stock return was relatively lower than its industry peers'.

The study showed that the impact of investment analysts' stock recommendations on CEO dismissal changed over time. The impact became weaker after litigation against some investment analysts in 2002, which damaged the credibility of investment analysts as a professional community.

"The board responded to negative or unfavorable analyst recommendations in their decision to dismiss the firm's CEO only to the extent that analysts were perceived as credible, and thus consequential to investors' decisions," Zhang said.

For each of the 500 companies, Wiersema and Zhang identified whether the firm experienced a CEO turnover in any year during 2000-2005 and whether the turnover was a voluntary turnover or dismissal. Within the six-year time period, they found a total of 239 turnovers, of which almost 30 percent were dismissals.

They examined three measures of investment analyst stock recommendations -- average analyst recommendation, change in average analyst recommendation (upgrading or downgrading) and percentage of sell recommendations -- all calculated from data gathered from the Institutional Brokers Estimate System. They found that for firms that were initially rated as a "buy" or "strong buy," a downgrade had a significant impact. For firms already rated as relatively unfavorable, further downgrades were not significant. For upgrades, there was no significant effect, regardless of the initial average analyst recommendation.

"An upgrade does not materially reduce the probability of CEO dismissal, while a downgrade increases the probability of CEO dismissal significantly," Zhang said. "That is consistent with prior findings that negative information alters investor perceptions more than positive information."

David Ruth | EurekAlert!
Further information:
http://www.rice.edu

More articles from Studies and Analyses:

nachricht Real-time feedback helps save energy and water
08.02.2017 | Otto-Friedrich-Universität Bamberg

nachricht The Great Unknown: Risk-Taking Behavior in Adolescents
19.01.2017 | Max-Planck-Institut für Bildungsforschung

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Breakthrough with a chain of gold atoms

In the field of nanoscience, an international team of physicists with participants from Konstanz has achieved a breakthrough in understanding heat transport

In the field of nanoscience, an international team of physicists with participants from Konstanz has achieved a breakthrough in understanding heat transport

Im Focus: DNA repair: a new letter in the cell alphabet

Results reveal how discoveries may be hidden in scientific “blind spots”

Cells need to repair damaged DNA in our genes to prevent the development of cancer and other diseases. Our cells therefore activate and send “repair-proteins”...

Im Focus: Dresdner scientists print tomorrow’s world

The Fraunhofer IWS Dresden and Technische Universität Dresden inaugurated their jointly operated Center for Additive Manufacturing Dresden (AMCD) with a festive ceremony on February 7, 2017. Scientists from various disciplines perform research on materials, additive manufacturing processes and innovative technologies, which build up components in a layer by layer process. This technology opens up new horizons for component design and combinations of functions. For example during fabrication, electrical conductors and sensors are already able to be additively manufactured into components. They provide information about stress conditions of a product during operation.

The 3D-printing technology, or additive manufacturing as it is often called, has long made the step out of scientific research laboratories into industrial...

Im Focus: Mimicking nature's cellular architectures via 3-D printing

Research offers new level of control over the structure of 3-D printed materials

Nature does amazing things with limited design materials. Grass, for example, can support its own weight, resist strong wind loads, and recover after being...

Im Focus: Three Magnetic States for Each Hole

Nanometer-scale magnetic perforated grids could create new possibilities for computing. Together with international colleagues, scientists from the Helmholtz Zentrum Dresden-Rossendorf (HZDR) have shown how a cobalt grid can be reliably programmed at room temperature. In addition they discovered that for every hole ("antidot") three magnetic states can be configured. The results have been published in the journal "Scientific Reports".

Physicist Dr. Rantej Bali from the HZDR, together with scientists from Singapore and Australia, designed a special grid structure in a thin layer of cobalt in...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Booth and panel discussion – The Lindau Nobel Laureate Meetings at the AAAS 2017 Annual Meeting

13.02.2017 | Event News

Complex Loading versus Hidden Reserves

10.02.2017 | Event News

International Conference on Crystal Growth in Freiburg

09.02.2017 | Event News

 
Latest News

Microhotplates for a smart gas sensor

22.02.2017 | Power and Electrical Engineering

Scientists unlock ability to generate new sensory hair cells

22.02.2017 | Life Sciences

Prediction: More gas-giants will be found orbiting Sun-like stars

22.02.2017 | Physics and Astronomy

VideoLinks
B2B-VideoLinks
More VideoLinks >>>