Executive migration: How information cues from departing firms and the labor market affect shareholder value

Research Question/Issue: This study examines the extent to which newly-hired migrating executives affect shareholder reaction at their arriving firms. We draw upon the information economics and upper echelons literatures to explain how (1) deviant behavior and ability information cues from an executive’s “departing” firm contribute to shareholder value at the “arriving” firm and how (2) labor market information cues moderate these relationships. Research Findings/Insights: We use event study methodology to determine investors’ reactions to the hiring announcements. We test our framework with a sample of 268 chief financial officers who migrated between 2002 and 2014. Controlling for sample selection and endogeneity, we find that a financial restatement at the migrating executive’s departing firm adversely affects shareholder reaction at the arriving firm. However, financial restatements at the departing firm adversely affect shareholder reaction at the arriving firm, especially when the migration is recent (i.e., within one-year). An extended analysis reveals an interaction between departing firm financial restatement and departing firm financial performance. Theoretical/Academic Implications: Our study contributes to the literature by theorizing and showing that investors screen by using information cues from migrating executives’ departing firms when signals are not salient in order to determine their contributions to shareholder reaction at arriving firms. Investors react negatively to deviant behavior information cues from the departing firms of newly hired executives. Also, the framework explains the moderating effect of labor market information cues -- investors react unfavorably to deviant behavior information cues when they involve same-year executive migrations. Practitioner/Policy Implications: Our study suggests that investors and hiring firms have divergent views on the value added of deviant behavior, yet convergent views on the value added from executive abilities.