The Stock Market Reaction to the CEO successor Announcement in Family Firms

We investigate the determinants of the market reaction to the announcement of the appointment of a CEO successor in French, German and UK listed family firms with an incumbent, family CEO during 2001-2010. Given the strong family control, we conjecture that investors expect a family successor and hence do not react to the announcement of the appointment of the latter. In contrast, the announcement of the appointment of a nonfamily successor is likely to be met by positive cumulative abnormal returns (CARs). In line with our conjecture, we do not find a market reaction to the announcement of the appointment of a family CEO, whereas the announcement of a nonfamily successor elicits positive and significant CARs. We then study the determinants of the market reaction to the announcement of a nonfamily successor. We find that the poorer the past performance of the firm, the more positive are the CARs. Also, the greater the board independence, the less positive are the CARs for poorly performing firms. The latter result is more pronounced when board independence is adjusted for links of so called independent directors to the controlling family. Finally, more positive CARs are observed for poorly performing firms, with a UK or US cross-listing.