Relevance On CEO Ability And Stock Return Volatility

Listed companies are facing systematic risks and idiosyncratic risks. The stock volatility of listed company is affected by number of factors; these factors may result from business fundamentals, or may also be derived from the market awareness of the corporate executives by investors. When investors lack the cognition of CEOs’ability, news reports about CEOs of the listed companies affect its volatility from two levels: On one hand, news reports will influence stock price directly; On the other hand, news reports will affect the public evaluation of the CEO and the prediction of his/her future performance, and thus indirectly cause fluctuations in stock prices. Public awareness of CEO ability deepened over time, that is to say, volatility reduced as CEO tenure growing. In this paper, based on above assumptions, using both Shanghai and Shenzhen market data, using econometric methods, the empirical research on relevance of the listed company’s stock return volatility and the public perception of the CEOs’ability has been done.In this paper, model-based setting to explore the assumptions was adopted, as well as the representative indicators and the data from establishment of China’s securities market until latest. This paper studied the volatility since the CEO turnover of each company listed in Shanghai and Shenzhen market, finishing more than seventy thousands of samples used, the conclusion is:with the passage of time after CEO turnover (in three years), volatility of stock returns reduces linearly. It is supported by Chinese market that the correlation of CEOs’ability cognition and listed companies stock return volatility is economically and statistically significant. The conclusion is related with the source of new CEO and reasons for former CEO leaving, that when the CEO is promoted from the company (endogenous CEO), stock return volatility rises. In addition, when CEO departures are caused by passive reasons, there is a positive effect on stock return volatility. In summary, awareness of the CEOs’ ability of listed companies is an important impact to stock return volatility.