CEO transitions in large, listed firms have least impact on stock prices, finds Jefferies India

A study conducted by Jefferies India analyzed 72 CEO transitions in large listed companies over the past five years and found that 53% of the transitions had no effect on the stock price trends

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A Jefferies India study covered 72 CEO transitions in large, listed companies over the past five years and found that 53 percent of these had no effect on the stock price trends. The study, instead, showed that external hires tended to have a positive impact on stock prices.

Jefferies predicts that several major corporations, including Kotak Bank, SBI, HUL, TCS, ICICI Pru, Tech Mahindra, HDFC, and others will replace their CEOs within the next year, representing approximately $465 billion in market capitalisation, accounting for 21 percent of Nifty’s weight and 17 percent of total FII holdings.

Read: India VIX at 20-month low, indicates bullish outlook; experts warn against complacence

Jefferies noted that CEO changes in companies like HUL, TCS, TechM, and ICICI Pru during the Covid period have brought attention to the impact of leadership changes on stock performance. As the macro and geopolitical situations change, businesses are likely to see more CEO transitions, such as in companies like Kotak and SBI.

Some companies, like RIL, are also implementing generational changes in leadership alongside formal CEO changes.

The analysis considered the ‘zero date’ to be one month before the actual announcement of the CEO change, as the market typically anticipates such changes. The study excluded transitions where promoters are actively managing the company and those in most PSUs where such changes are government-directed and routine.

The analysis found that CEO transitions had a generally even impact on stocks, with 53 percent having no effect on the relative performance of the stock. In cases where there was a change in relative performance (47 percent of transitions), 68 percent of the changes were positive, indicating that underperforming stocks became outperformers in six months, split equally between internal and external replacements.

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Smaller-cap companies tended to hire externally for CEO replacements, with 55 percent opting for this route, while less than 40 percent of large-cap companies went for external hires. CEO changes had a significant impact on the Staples sector and the non-bank financial sector but had minimal impact on the consumer discretionary sector.

Jefferies excluded other factors that could influence stock performance over longer terms from its analysis.

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