An Analysis Of Market Reaction To Chief Executive Turnover Announcement In Indonesia: A Trading Volume Approach

Abstract

This research aims at examining market reaction to Chief Executive Officer (CEO) turnover announcements using trading volume approach. The sample of this research consists of 67 CEO turnover announcements without confounding effects and 117 CEO turnover announcements with confounding effects during the period 1992-2003 from Indonesian Stock Exchange. The authors use a t-test to examine the hypotheses. The results for market reaction to CEO turnover announcements using sample firms without confounding effect show that the trading volume before and after the CEO turnover announcements is not significantly different. In contrast, the trading volume before and after the CEO turnover for sample with confounding effect is significantly different. The results show that Indonesian investors consider other confounding events along with the CEO turnover announcements to make investment decisions. Analysis is also conducted to examine the influence of the succession process and the origin of the new CEO on the market reaction toward CEO turnover announcements. We do not find significant difference between the trading volumes before and after the CEO turnover announcement without confounding effect under both organizational contexts. On the other hand, we find significant difference between the trading volumes for non-routine CEO turnover announcements with confounding effects. This suggests that non-routine CEO turnover contains useful information to investors. In addition, significant difference in the trading volume between before and after non-routine CEO turnover with outside successors implies that Indonesian investors expect the incoming CEO from the outside to improve the performance of the company after the turnover process.