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Study of sudden CEO deaths suggests that investors assign much more importance to chiefs today than they did in past decades

July 1, 2012

For more information, contact: Benjamin Haimowitz, (212) 233-6170,

As recent shareholder rebellions at Citigroup and WPP Group suggest, CEO compensation remains an incendiary issue. Yet, for all the outrage the topic engenders, a body of recent management research suggests that, in one  way at least, CEO pay reflects a plain reality:contemporary CEOs considerably exceed their forbears in importance.
And now, new research provides evidence that the stock market agrees.
In a paper to be presented at the forthcoming annual meeting of the Academy of Management(Boston, Aug. 5-7), Timothy J. Quigley, an assistant professor of management at Lehigh University, investigates the market's response over the course of 60 years to sudden deaths of chief executives and finds that "the magnitude of market reaction -- that is, the size of the reaction, positive or negative but without regard to the actual sign -- to these unfortunate events has increased significantly between 1950 and 2009."
Thus, in the 30 years from 1950 through 1979, the mean three-day cumulative abnormal response (CAR) to CEO sudden deaths was 3.5%, whereas from 1980 through 2009, it was 5.6%. (CAR in this case is the change in a firm's stock price, whether up or down, from the day before a CEO's unexpected death through the day after, adjusted for company stock performance over an extended prior period and for the market's performance in the three-day period enveloping the death.)
Similarly, in successive 20-year periods, the mean three-day CAR rose from 2.8% in the period 1950 through 1969 to 4.9% in the years 1970 through 1989 to 5.7% in the span 1990 through 2009, a more than doubling in market response between the first period and the third.
Results were even more striking for some longer intervals. In the four days from the day before CEO deaths through two days after, the mean CAR rose from 2.8% in the period 1950-1969 to 7.0% during 1990-2009. In the longest interval tabulated in the study, from the day before death through the following 30 days, the mean CAR rose from 7.0% during 1950-1969 to 14.7% during 1990-2009.
"When a CEO passes unexpectedly," Prof. Quigley explains in his paper, "a shareholder is left to perform some simple calculus. Did the passing CEO possess exceptional, average, or poor ability? And, what is the likelihood that a replacement will be significantly different, either positive or negative? If shareholders believed CEOs generally had little or no impact on firm outcomes, the loss of a CEO would be a non-event as each would be equally constrained and the overall effect of the transition would be trivial." The fact that this effect has been growing, though, suggests otherwise -- namely, that "shareholders clearly place a greater emphasis on the individual heading publicly traded corporations today versus these earlier periods."
In sum, "without speaking to the merits of the rise of the celebrity CEO or the massive increases in CEO pay, these results suggest these changes are coupled with changing beliefs about CEO impact that go beyond media and casual observation." Further, "while it is easy to see journalists and average viewers overemphasizing the human causes of firm outcomes, it is less clear that shareholders would succumb to the same thing."
What accounts for the increased importance assigned to CEOs? In a working paper that Quigley co-authored with Donald C. Hambrick of the Smeal College of Business at Penn State University, the professors observe that in the decades following World War II (the era of William H Whyte's The Organization Man), CEOs were almost invariably "appointed through succession processes that generally placed a premium on stability and continuity...As a result, there were limited differences in the profiles and outlooks of successive CEOs; more broadly, boards went to great lengths to minimize the degree to which succession was momentous at all."
That changed considerably when "during the latter decades of the century, an array of macrosocietal forces aligned to increase the amount of influence CEOs had over corporate outcomes. The shift to investor capitalism [influenced by Milton Friedman and Ronald Reagan] impelled CEOs to engage in more novel and riskier strategies. Heightened task demands, emanating from more intense competition and a more dynamic environment, amplified the performance disparities between better and worse CEOs. And there was a broader menu of legitimate strategic alternatives to consider" -- for example, "an expanded array of international alternatives both in terms of where [firms] could sell and where they could produce."
Indeed, Quigley and Hambrick go on to find, using an combined measure of return on assets, return on sales, and market-to-book ratios, that up until the mid-1980s the aggregate CEO effect remained relatively constant at about 15% before increasing steeply and fluctuating around 25%. In the words of the study, "the effects of CEOs on performance outcomes became more pronounced in the latter decades of the century -- for good and for ill."
And, as Quigley's study for the Academy of Management meeting suggests, investors recognize this. He reached this conclusion by searching obituaries reporting the deaths of top executives of public companies for each year between 1950 and 2009 and then determining who were CEOs and whether their deaths were, indeed, unexpected and sudden, which involved ruling out even brief illnesses. A total of 193 unexpected deaths were identified, the majority caused by heart attacks, with other causes including plane crashes, automobile accidents, cerebral hemorrhages, and strokes. In calculating the impact of deaths, the study controlled for CEO ages and whether or not they were founders, as well as for companies' returns on assets.

The paper, entitled "The Changing Value of CEOs: Evidence from Market Reaction to Unexpected CEO Deaths, 1950-2009," will be as among several thousand research reports at the Academy of Management annual meeting, to be held in Boston from August 5th through 7th.  Founded in 1936, the Academy of Management is the largest organization in the world devoted to management research and teaching. It has some 19,000 members in 102 countries, including about 11,000 in the United States. This year's annual meeting will draw more than 9,000 scholars and practitioners for sessions on a host of subjects relating to business strategy, organizational behavior, corporate governance, careers, human resources, technology development, and other management-related topics.

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