scorecardresearch‘The impact of CEO transition is fairly even for stocks,’ says Jefferies;

‘The impact of CEO transition is fairly even for stocks,’ says Jefferies; Here's why

Updated: 14 Apr 2023, 12:12 PM IST
TL;DR.

The global brokerage analysed 72 CEO changes at large listed companies over the course of the previous five years and discovered that, in 53% of those instances, stock price trends remained stable. But in many instances, hiring outside employees seems to have benefited stock price trends.

Jefferies: The impact of CEO transition is fairly even for stocks, with about half (53%) of the events not producing any change in the relative performance of the stock

Jefferies: The impact of CEO transition is fairly even for stocks, with about half (53%) of the events not producing any change in the relative performance of the stock

Several large-cap companies chief executive officer (CEO) changes announced in recent weeks have drawn the attention of international brokerage Jefferies India Pvt Ltd to the potential impact of executive transitions on stock performance.

The CEOs of many large-cap companies with a market cap of around US $465 billion, including Kotak Mahindra Bank Ltd, State Bank of India Ltd, Hindustan Unilever Ltd, Tata Consultancy Service Ltd, ICICI Prudential Life Insurance Ltd, Tech Mahindra Ltd, HDFC Ltd, etc., are expected to shift during the course of the next 12 months, according to the global brokerage.

Tata Consultancy Services Ltd, Tech Mahindra Ltd, Hindustan Unilever Ltd, and ICICI Prudential Ltd, have announced CEO changes in recent weeks.

In October of this year, the State Bank of India Ltd (SBI), the country's largest lender, will vote on whether to extend Dinesh Khara's contract. Meanwhile, Kotak Mahindra Bank Ltd's managing director (MD) and CEO's term will come to an end on December 31, 2023.

The global brokerage analysed 72 CEO changes at large listed companies over the course of the previous five years and discovered that, in 53% of those instances, stock price trends remained stable. But in many instances, hiring outside employees seems to have benefited stock price trends.

"The impact of CEO transition is fairly even for stocks, with about half (53%) of the events not producing any change in the relative performance of the stock i.e. stocks outperforming leading up to the transition continued to outperform post transition as well. Ditto for underperforming stocks. In cases where stocks reversed relative performance (the balance 47%), 68% of the changes were for good, meaning underperforming stock becomes an outperform stock in 6 months, split equally between internal replacement versus external replacement," said Mahesh Nandurkar, Jefferies analyst.

The list of these 72 changes does not include those where promoters are clearly involved in management (such as DLF, Maruti, etc.), nor does it include most Public Sector Undertakings (PSUs) or State-Owned Enterprises (SOEs), where such changes are frequently mandated by the government.

"To analyse the stock impact, we look at its relative performance over a +/-6-month period from the 'zero date'. We believe over longer terms, multiple other factors can influence stock performance and hence excluded," added Nandurkar.

According to the report, the brokerage defines the 'zero date' as one month prior to the actual announcement of CEO change, given that the market usually senses such changes.

Further, the brokerage noted that smaller-cap companies were more likely to hire an external candidate to replace the CEO, with 55% of them making this decision. Meanwhile, less than 40% of large-caps replaced CEOs with external hires.

"Among sectors, it is interesting to note that CEO change had a disproportionate change in Staples (5/7 saw change in relative performance) and non-bank financials (8/10), but practically none in consumer discretionary (only 1/10 saw a performance change)," added the global brokerage.
 

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First Published: 14 Apr 2023, 12:12 PM IST