A:

A change in stock price when a new CEO takes over a company can vary depending on a number of factors. Many of these factors are based on the market perception of how capable the new CEO is of taking the company forward. Regardless of whether the change is planned or the result of unexpected circumstances, the way the stock performs partly reflects how the company manages the transition.

A change in CEO carries more downside risk than upside, and there is even more risk when the transition is unplanned. This is due to the possibility that the new CEO may shift corporate strategy for the worse. The management of the transition and the agenda set by the new CEO are important factors for investors to consider.

Investors tend to be more comfortable with new CEOs who are already familiar with the dynamics of the industry in which the company operates and the specific challenges the company may be facing. This further highlights perceptions over whether the new CEO is an insider or an outsider, regardless of whether he or she is an internal or external candidate.

Reputation is also an important factor, particularly as investors assess the CEO’s track record for creating shareholder value. This pedigree could be reflected in a number of areas, including an ability to grow market share, reduce costs or expand into new growth markets.

Despite initial investor concerns, there is no positive correlation between how the stock performs on the day the new CEO is announced and how it performs from that point forward.

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