The Relationship Between Chairmanship and Ceo Changes and Stock Return of the Manufacturing Companies Listed in the Nairobi Securities Exchange

Abstract

Directorship in any organization determines the direction that the company takes which affect its profitability and general operations. When directors change in an organization the company shares at the stock market responds either positively and negatively. Change in directorship can have positive and negative effects on the performance of an organization, Effective directors can use their experience to make a substantial difference at both levels, but they only have the time to get involved in those few decisions to which they can make a significant contribution (Palmberg, 2010). The study sought to establish the relationship between CEO and chairmanship changes and stock performance of the manufacturing companies listed in the Nairobi Securities Exchange. The researcher used an event study research design to determine the effects of change of CEO and chairmanship on the financial performance of an organization. The study focused on the population universe which was all the manufacturing companies listed on the Nairobi Securities Exchange that had announced CEO and chairmanship change during the calendar years 2000 to 2012. The study was a census and therefore looked at all the manufacturing companies listed in Nairobi Stock Exchange. Secondary data was used to determine the effects of change of directorship on the stock performance of an organization in the NSE. Regression analyses were used to reinforce the results. It analyzed the rate of return on security and the rate of return on the market index in period of the listed manufacturing firms. Positive abnormal performance is detected following change of CEO, but is not concentrated in or confined to the days immediately following change. The study found that there was abnormal negative performance prior to change in CEO. The study found that there was abnormal positive performance after change in CEO. The year before change there is significant negative abnormal performance. The study found that there was no abnormal performance after change in chairmanship. There exists a significant relationship between return on security and return on stock before and after CEO change. Specifically, before the CEO change event, low prior performance triggers higher turnover (but high prior performance does not affect CEO change). There is a positive significant relationship between return on security and return on stock after CEO change. The shareholders invest heavily in the firms having higher Corporate Governance provisions as these firms create value for them. The study recommends that effective CEO be put in place. To turn around underperforming firms, the board needs to hire an outsider CEO instead of a corporate insider. Listed companies’ boards’ should plan a succession strategy of the CEO. This will help to avoid negative effect on stock performance.