Do Market Reactions to CEO Deaths Tell Us Anything Useful about CEO Pay?

Tom Gosling writes:

So what is a CEO really worth, and can that ever be £4m a year? Two rather morbid papers shed light on the question by looking at the market reaction to sudden CEO deaths. Many methods for looking at the impact of CEOs on company performance suffer from the problem that it can be almost impossible to untangle the various factors in play that affect performance. By contrast, the Grim Reaper runs a randomised trial, with sudden deaths reasonably considered exogenous to company performance. It seems callous, but as a result these sad cases do provide insight as to how shareholders value CEOs.

Both papers look at the Cumulative Abnormal Return (CAR) over a short period around the time of the CEO announcement to quantify the impact that shareholders ascribe to the CEO’s death. That is, the amount the share price moves above or below what would reasonably have been expected without the death.

Our view: these stock price responses tell us more about uncertainty and concerns about transitions than about the individual market value of the late CEO.

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