Signaling in the Aftermath of Wrongdoing: Investor Reactions to Turnover at the Top

If an organization’s management is caught in the act of inappropriate behavior, it may call for a changing of the guard. Surprisingly, though, there is little empirical evidence examining the presumed benefits of executive turnover in the aftermath of wrongdoing. In this study, we develop a signaling theoretic model of CEO turnover following financial misrepresentation. We theorize that some CEO successions provide positive signals to investors, but others actually constitute negative signals. We also describe how some signals both reduce information asymmetry and increase information uncertainty, which has negative consequences in the market. We test our ideas in two complementary studies – one using archival data and the other using survey data. The first is a firm-level event study of market reactions to CEO successions following a material financial statement restatement. The second is an individual-level policy capturing study of institutional investors that examines the same hypotheses in a more con...