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 Multi-year study finds 'hotspots' of ammonia over world's major agricultural areas
17.03.2017 | University of Maryland

nachricht Diabetes Drug May Improve Bone Fat-induced Defects of Fracture Healing
17.03.2017 | Deutsches Institut für Ernährungsforschung Potsdam-Rehbrücke

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: Giant Magnetic Fields in the Universe

Astronomers from Bonn and Tautenburg in Thuringia (Germany) used the 100-m radio telescope at Effelsberg to observe several galaxy clusters. At the edges of these large accumulations of dark matter, stellar systems (galaxies), hot gas, and charged particles, they found magnetic fields that are exceptionally ordered over distances of many million light years. This makes them the most extended magnetic fields in the universe known so far.

The results will be published on March 22 in the journal „Astronomy & Astrophysics“.

Galaxy clusters are the largest gravitationally bound structures in the universe. With a typical extent of about 10 million light years, i.e. 100 times the...

Im Focus: Tracing down linear ubiquitination

Researchers at the Goethe University Frankfurt, together with partners from the University of Tübingen in Germany and Queen Mary University as well as Francis Crick Institute from London (UK) have developed a novel technology to decipher the secret ubiquitin code.

Ubiquitin is a small protein that can be linked to other cellular proteins, thereby controlling and modulating their functions. The attachment occurs in many...

Im Focus: Perovskite edges can be tuned for optoelectronic performance

Layered 2D material improves efficiency for solar cells and LEDs

In the eternal search for next generation high-efficiency solar cells and LEDs, scientists at Los Alamos National Laboratory and their partners are creating...

Im Focus: Polymer-coated silicon nanosheets as alternative to graphene: A perfect team for nanoelectronics

Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are less stable. Now researchers at the Technical University of Munich (TUM) have, for the first time ever, produced a composite material combining silicon nanosheets and a polymer that is both UV-resistant and easy to process. This brings the scientists a significant step closer to industrial applications like flexible displays and photosensors.

Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are...

Im Focus: Researchers Imitate Molecular Crowding in Cells

Enzymes behave differently in a test tube compared with the molecular scrum of a living cell. Chemists from the University of Basel have now been able to simulate these confined natural conditions in artificial vesicles for the first time. As reported in the academic journal Small, the results are offering better insight into the development of nanoreactors and artificial organelles.

Enzymes behave differently in a test tube compared with the molecular scrum of a living cell. Chemists from the University of Basel have now been able to...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

International Land Use Symposium ILUS 2017: Call for Abstracts and Registration open

20.03.2017 | Event News

CONNECT 2017: International congress on connective tissue

14.03.2017 | Event News

ICTM Conference: Turbine Construction between Big Data and Additive Manufacturing

07.03.2017 | Event News

 
Latest News

Northern oceans pumped CO2 into the atmosphere

27.03.2017 | Earth Sciences

Fingerprint' technique spots frog populations at risk from pollution

27.03.2017 | Life Sciences

Big data approach to predict protein structure

27.03.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>