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along with the company's CEO changes, how does the market changes?

A £375,000 bonus for SIGs new chief executive Steve Francis has been voted through at the companys General Meeting (GM) today -despite strong opposition. This follows news last week that shareholder advisory group ISS was leading a protest against the bonus for the turn around specialist.


The Sheffield-based firm wanted to pay out in recognition of Francis work since February 25, having credited him with having a big impact already. In its response to ISS suggestion that it was poor practice, a spokesperson highlighted that Francis joined on a lower salary than his predecessor and had taken a 20% cut in salary for the last three months.


However, at todays meeting the bonus - proposed under resolution five - was approved, despite 44% of votes cast against the motion. Commenting after the meeting, a statement from Sheffield-headquartered SIG explained: The Board welcomes the majority support for the one-off payment of £375,000 to the CEO of the company outside the terms of the Directors Remuneration Policy but acknowledges a significant number of votes were cast opposing the resolution.


As a result of the revolt the firm has stated in plans to consult with shareholders on amendments to the Directors Remuneration Policy and that this consultation will include resolution five or Francis bonus. The statement concluded: The Board expects to provide an update on the companys website on this consultation process and any actions taken or proposed to be taken within six months of todays date.



Chief Executive Officer's (CEO) role is considered as one of the most important and critical in an organisation. Senior media and financial analysts admit, that reputation of the CEO has a significant impact on how the company is perceived by them, most notably it influences the likelihood of buying and holding shares of the company. No matter what the reason may be CEO turnover significantly increases the likelihood of strategic changes at the firm. Especially if firm is poorly performing then CEO turnover can result in strong managerial discretion over financial variables such as RandD, advertising, capital expenditure and accounting accruals.


The extent of market reaction following departure of CEO like any other event can be analyzed using Efficient Market Hypothesis (EMH). EMH in fact served as an underpinning to random walk hypothesis - a financial theory, that claims, that prices always fully reflect the information available and no profit can be made from information-based trading. Hence according to EMH after the event, prices should immediately incorporate all information in an unbiased fashion. But it is not always the case, as the behaviour of market participants is not always completely rational and sometimes investors adjust their reaction, proving market initial over or under-reaction, hence it is partially inefficient.


So, along with the company's CEO changes, how does the market changes? Dipesh Karki and Binam Ghimire found that in case of CEO turnover in fortune 500 companies, there is positive market abnormal return prior to the announcement of CEO departure which is in line with the ability hypothesis. These results are consistent with other similar studies conducted in the USA and other countries. Further the absence of post-event adjustments further shows a confirmation of market efficiency. Meanwhile unlike the suggestion by Borokhovich, the study showed that insider succession lead to better market reaction. This could be explained by reasoning that since top companies are very complex to operate it would be very difficult for outsider to acclimatize with its working. Meanwhile since CEOs who are promoted from the within are already familiar with the business the company would likely perform well.


In addition this study also showed that both voluntary and forced departure didn't register any reaction which can be attributed to the fact, that companies deliberately prepare the market for the CEO turnover so as to avoid any unease in investor community. Finally the empirical study indicated strong negative return on third day after the event which could be result of market correction after period of uncertainty.


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