The impact of an announcement of a one-‐dollar CEO on the stock market

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The impact of an announcement of a one-‐dollar CEO on

the stock market

Andrey Fyodorov

S1684582

Supervisor: dr. Bo Qin

Co-‐assessor: drs. Abdul Rehman Abbasi

University of Groningen

MSc Business Administration – Organisation Management & Control

Master Thesis

2013

Abstract

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Introduction

Since the financial crunch of 2007 the incentive compensations of managers is under attack, from the public. The media trumpets every year list, with CEO compensations, who were paid the highest? Who received the biggest bonuses? CEOs are almost nailed to a pillory. While corporations are cutting costs, CEOs are receiving huge salaries and bonuses, while employees are losing their jobs. There is an increasing pressure from the internal and external environment to cut bonuses for the top management. Institutions and corporate governance protecting this mechanism of reward system are under pressure. Governments, media and shareholders are demanding that managers withdraw their bonuses or even repay them. Since the managers are paid excessive salaries and bonuses, for bad performance. In a recent event of 2013 the stock price of SNS REAAL plummeted and a government bailout was in order for the bank to survive. A reporter from the public network in the Netherland blogged that the CEO of SNS REAAL should return the bonuses he had received in the previous years. As a reaction a lot of people were upset and started threating him, he had to submerge, fearing his own life. Apparently the public does not accept huge bailouts and bonuses, during a recession.

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According to (Rebhein., 2007), increasing diverse pressure grows to curb executive pay. Top managers justify that high compensation is necessary for the increasing risks of taking on the top leadership position. In 1970, the CEO from Chrysler reduced his pay to a one-‐dollar salary, with stock options. Chrysler was then struggling, and needed government help. This send out a new positive message to both the government and the public, Chryslers CEOs was willing to reduce costs while working for a buck. This was controversy to the system, taking a CEO position and not accepting large salary payments. On the other hand he received huge compensation packages based in stock options, camouflaging his intentions.

The BusinessWeek wrote in 2007: “during the credit crunch that CEOs who are willing to accept a one-‐dollar salary, imply a symbolic gesture to employees, the public and investors”. This sends out a very strong signal to the investors, that the CEO will be only rewarded when they are too. Labor unions criticize this behavior, according them it is merely a publicity stunt, by egotistical CEOs who are paid million in stock and option, and who are already rich.

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This study will try to contribute to literature, because the topic of a one-‐dollar salary is new. Monitoring the security markets and what the effects are, on the turnover of a one-‐dollar CEO and separating the sample into powerful CEOs and less powerful. This will expand the knowledge in the field of finance. And try to capture the message the one-‐dollar CEO is trying to send out, with accepting such a salary package. Does the stock market react to such a message? How will the market evaluate the message of a one-‐dollar CEO?

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Literature review

The Chief Executive officer is the highest executive in a corporation and in charge of the total management. He is responsible for the corporation. CEO compensation exists of different packages, such as regular salary, stock packages and reward bonuses and performance vested stock options, such as a one-‐dollar salary. In classic agency theory it is assumed that CEO compensation contracts are an arms-‐length transaction that provides an efficient solution for the shareholders of the corporation (Jensen & Mecking., 1976). The CEO uses this incentive mechanism to extract salary from the shareholders, in whatsoever form (Bebchuk et al., 2002). Agency theory makes sense of the compensation plans, because their compensation levels demand higher management skills and increased risk associated with taking a CEO position (Murphy & Zabojnik., 2004) The primary objective of a corporation is to maximize shareholder value (Sundaram et al., 2004). This study will make a distinction between compensation contracts; the one-‐dollar CEO versus a CEO with a regular salary, and the reaction of the stock market, to an announcement in turnover.

CEO turnover

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is assumed. It states: “a stocks abnormal return at time, should reflect the release of the information at the same time” (Basu., 1977). Any information released before then should have no effect on abnormal returns in this period, because all available information has already been incorporated in the stock price. Assuming the market is efficient and all information is incorporated. The stocks return known only in the future cannot influence the stock return either. The announcement of the CEO turnover is before the turnover date, and the market has already incorporated this information.

Securities Market

The Securities Act of 1933 and Exchange Act of 1934 provide the basic regulatory framework for the United States for the public trading of securities. The 1933 Act places an emphasis on the issuing of new securities. The 1934 Act extends the disclosure requirements of all the available securities under the Act of 1933, which are traded on the market after their issue. The intent of the registrations statement is to provide potential stockholders with all the available information to make a reasonable decision on the stock. Assuming the stock price includes all the relevant available information. The security markets will be represented by the S&P 500, it is an equity index that is one of the most followed indices and it is considered the best representation of the market of the United States economy (The National Bureau of Economic Research) After the announcement of a turnover in CEO a distinction is made in compensation packages the first is the regular salary and the second the one-‐dollar salary.

Regular salary

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experience, tenure within the corporation (Hogan & McPheters., 1980). This results in higher pay level than the rest of the management. It is also expected that the CEO potentials impact the corporation’s performance. Will the market appreciate the announcement of a regular salary CEO?

One-‐dollar salary

There is a shift in a trend to switching to a one-‐dollar salary. CEOs of corporation such as Oracle, Google, Hewlett & Packaard, Kinder Morgan and Whole Foods have already implemented such a reward system (The Forbes., 2007). The likelihood of a one-‐dollar salary increases, when the CEO is rich, overconfident and owns a sizeable ownership stake in the corporation (Dan Zang et al., 2011). These one-‐dollar salary CEOs seem to be in a powerful situation in which significance is drawn under private benefits. The Fortune (2011) wrote that one-‐dollar CEOs gave up around $610.000 in annual wages but gained more than $2 million in incremental options awards. Literature suggests that there is an alignment with CEO and shareholder goals, in the structure of compensation (Jensen & Murphy., 1990). In accordance with traditional agency theory a large equity based compensation plan makes the CEO behave more like stockholders and thus decrease the agency costs of equity (Jensen and Meckling., 1976). However the purpose of one-‐dollar CEO salary is to incent the CEO to take on greater risks and benefit the firm from its growth opportunities (Smith & Watts., 1992). This is the result of taking a risky position in receiving a one-‐dollar salary. CEO tends to take different positions when taking a one-‐dollar CEO, a more in-‐depth view will be provided in the next part, focusing on CEO power.

CEO Power

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or increasing the share price (Xuan., 2009). The power of the CEO is based on his relation with the shareholders, when the CEO is in the board he has more power.

The second measure of power will be the governance structure of the cooperation. In the article of (Abernethy, Kuand & Qin., 2013), they mention that a good cooperate governance structure will determine a significant executive pay. CEOs have various incentives to support arrangements favorable to powerful top managers (Morese et al., 2011) they also mention that poor governance structures will lead to more power to the CEO. These characteristics of board and ownership structure have a negative relation with subsequent cooperation operations and stock return performance. Cooperation’s with weaker governance structures have greater agency problems (Core et al., 1998). He found that cooperation’s with weaker governance structures have greater agency problems; CEOs with greater agency problems receive greater compensation. A measure of strong or weak corporate governance will be based if the board is presumed. To be more independent, the number of outside directors increases proportionately .The corporate governance in the US has increasingly shifted towards independent boards with a majority of outside (independent) directors. Board monitoring effectiveness may manifest itself in managerial hiring and firing decisions. CEO turnover is one possible measure of gauging effectiveness. The paper by (Weisbach., 1988) tests the hypothesis that inside and outside directors behave different, in their decisions to remove the CEO. A distinction will be made between an outsider and insider successor type of CEO. Inside CEO tend to have accumulated power throughout their career within the corporation, thus having more power.

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Conceptual model

During this part hypothesis will be formed and the research question. A distinction will be made between the dependent and independent variables.

This research will consist of two parts. The first part will be an investigation of how the stock market reacts to a CEO turnover based on the whole sample. The second part will consist of the reaction of the stock market on the announcement of a one-‐dollar CEO versus a regular salary CEO. This will be contrasted to the power of the one-‐dollar CEO. Does the market appreciate the announcement of a one-‐dollar CEO, based on power? This will lead to the following research question for this study:

How does the stock market react to a one-‐dollar CEO announcement? From the research question, the following hypotheses are generated:

Hypothesis

Hypothesis 1 The announcement of CEO turnover has influence on the abnormal returns Hypothesis 2 The announcement of a one-‐dollar CEO has influence on the abnormal returns Hypothesis 3 The power of a one-‐dollar CEO has influence on the abnormal returns Hypothesis 4 The announcement of a regular salary CEO has influence on the abnormal

returns

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In the conceptual model above the CEO turnover announcement is the independent variable, it is split up into regular and one-‐dollar salary, and they are the independent variables. The independent variables will have an influence on the dependent variable the stock market reaction. Assuming that a one-‐dollar CEOs can be powerful or not, a new variable will be coded for the CEO power. Indicating that power of the CEO can influence the stock market’s reaction. The power of the CEO is based on the corporate governance structure, camouflage or key position within the corporation (board member).

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Methodology

The stock market reaction on the announcement of a CEO turnover can measure by using an event study. Event studies have been used in a wide range of setting including finance (MacKinlay et al., 1997). An event study is a statistical method to assess the impact of an event on the value of the firm. Event studies are based on the theoretical framework of efficient capital market and the notion that security prices include all information available to the market. As a result the announcement made by firms provided to market participant’s information it can be impounded into the market price (Konchitchki & O’Leary., 2010). In the methodology the framework for the research will be explained, first the identification of the event will be explained, followed up by creating the event window. Further it will be elaborated how the samples are chosen and how the returns are calculated.

Identifying event & event window

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The normal return is the stock return of the individual corporation if there was no special event such as an M&A. To calculate the normal return the estimation window is the long window event of day’s sets from [-‐53 to -‐ 3]. The estimation period is before the event, so these can be seen as the normal returns. The choice of the estimation period is arbitrary; (Brown & Warner., 1980), for this event a 50 day estimation window is used. For calculating the normal return of a stock

the mean adjusted model is used. This explains the normal return as the average return within the event window. The following formula is used for calculating the normal return:

The i is the stock index and the T is the numbers of days during the event window. For calculating the normal return of a stock, the daily stock return for the estimated window was found. For calculating the daily return the following formula was used:

The i is the stock index and t refers to time (day). R i,t is the stock return for day t and stock i; Pi,t is stock price for day t and stock i. This is done for both the one-‐dollar CEOs and the regular dollar CEOs.

Sample selection

The selection of the sample set of firms to be included in the analysis. The total sample size for this study is 207 CEOs, from public traded cooperation’s, based in the US. Drawn from this sample the average abnormal returns and the cumulative average abnormal returns will be provided. Data will be provided, to measure if the announcement of CEO turnover has influence on the returns. The findings of this sample consist of 146 powerful CEOs from the Forbes 500 list. The other 61 are one-‐dollar CEO, they were found using LexisNexis database.

Abnormal and cumulative abnormal returns

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examining abnormal returns and cumulative abnormal returns (CAR); it indicates the extent to which the market adjusts the firm’s value in response to the new information signal obtained through the firm-‐related announcement. The cumulative abnormal returns are expected to be negative or positive depending on whether the market believe that the turnover of the CEO will result in incremental negative of positive future cash flows (Konchitchki & O’Leary.,2012). The same formula is used for calculating the expected market return for the event window; the S&P 500 provided the expected market return.

For calculating the historical market returns for the estimation window the following formula can be used:

After calculating the actual return and the expected return the difference can be calculated providing the abnormal return formula:

The AR is the abnormal return, the R is the actual return of the stock within the event window, and NR is the normal return of the event window.

The market model will be used, to increase the power of the test other factors such as beta and alpha and the risk free rate will be included to the excess return of the market portfolio (S&P500). The abnormal returns will be generate given by a security over a period of time (-‐53 to –3). The expected rate of return is the estimated return based on the CAPM model, mentioned below. The Rs is the return on the return of the stock minus the risk free rate for the current day. The beta and alpha are calculated using the long window return, using a regression, the data is provided in excel.

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Average abnormal returns (AAR)

For the average abnormal returns the actual return of the stock for that day is taken, subtract the expected return for that day from the S&P 500 including the following formula for calculating the abnormal return: Rs – ((alpha + beta*(Rmkt –Rf) + Rf)). This is done before the announcement day [t-‐1], the announcement day itself [t=0] and the day after the announcement day [t=+1]. Averaging the result for each day creates the AAR of each event day. Cumulative average abnormal returns (CAAR)

The next step is to calculate the cumulative average abnormal returns of all the stocks. The following formula is used for calculating CAAR:

The results are provided in excel. Providing these data statistical

test in SPSS and excel can be performed. The goal of the statistical test will be to test if the announcement of a CEO turnover has positive or negative impact, and to measure the impact of the stock market. For this the T-‐test method can be used, the t-‐test is a test to see whether the null hypothesis is supported or not. It can determine whether the implication of two data sets is significantly different from each other or not. This requires the testing of the previous stated hypotheses. This indicates that the announcement of the regular or one-‐dollar CEOs and the CAAR all should be zero, implying that the announcement has no influence on the reaction of the stock market.

Regression

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Descriptive statistics

The next table provides the descriptive statistics on the returns on various event windows, using the market return and comparing them with the regular versus the one-‐dollar CEO. Both the median and the mean AAR and CAAR on different event days and windows for a regular CEO they are both positive and significant. The mean has one main disadvantage; it is particularly susceptible to the influence of outliers. These are values that are unusual compared to the rest of the data set by being especially small or large in numerical value. The median is less affected by outliers and skewed data. All tests are significant. Indicating there is a difference between the one-‐dollar salary CEO and the regular CEO turnover announcement for both the median and the mean. For this table ANOVA and the Mann-‐Whitney tests are used to compare mean and median, representatively.

One dollar CEOs versus regular salary CEOs

Variable Regular

(N=146)

One Dollar (N=61)

p-‐value

Mean Median Mean Median t-‐test Mann-‐ Whitney AAR -‐1 0.0030 0.006 -‐0.0251 -‐0.0308 <0.01 <0.01 AAR 0 0.0028 0.0043 -‐0.0101 -‐0.0146 <0.05 <0.01 AAR +1 0.0082 0.0077 -‐0.0148 -‐0.0285 <0.01 <0.01 CAAR [-‐1] 0.0003 0.0062 -‐0.0251 -‐0.0242 <0.01 <0.01 CAAR[-‐1,0] 0.0058 0.0090 -‐0.0352 -‐0.0516 <0.01 <0.01 CAAR[-‐1,+1] -‐0.0500 0.0121 -‐0.0500 -‐0.0781 <0.01 <0.01 B. Qin 8-11-31 24:16

Comment [1]: Keep 4 decimal palaces for

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The next table provides the median and mean comparison between the less powerful and powerful CEOs. The mean and median between the samples is compared in terms of AAR and CAAR for different event days and windows. After the day of the announcement, the mean and median for the powerful CEOs differs, this can be the result of outliers. When p-‐value is > 0.05, the difference in mean and median between the two groups is significant. This is the case for AAR 0, CAAR [-‐1, 0] and CAAR [-‐1, +1]. When the p-‐value is < 0.05 the mean and median between the groups is not significant. This is the case for AAR-‐1, AAR+1 and CAAR [-‐1].

Powerful CEOs versus less powerful CEOs (both in one dollar salary sample)

Variable Powerful CEOs (N=40) Less powerful CEOs (N=21)

p-‐value Mean Median Mean Median t-‐test Mann-‐

Whitney AAR -‐1 -‐.0305 -‐0.0241 -‐.0148 -‐0.0241 .253 .400 AAR 0 -‐.0175 -‐0.0188 .0057 -‐0.0063 .044 .012 AAR +1 -‐.0240 -‐0.0305 .0052 -‐0.0157 .195 .053 CAAR [-‐1] -‐.0305 -‐0.0241 -‐.0148 -‐0.0242 .253 .400 CAAR[-‐1,0] -‐.0490 -‐0.0520 -‐.0076 -‐0.0242 .032 .042 CAAR[-‐1,+1] -‐.0743 -‐0.0806 -‐.0038 -‐0.0424 .029 .012 B. Qin 20-6-13 20:23

Comment [2]: When p-‐value is less than

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Results

This part will provide the results of the event study and the regression analysis of the research. All the model and calculations can be found in excel. A brief summary of the results is provided in the appendix. The first part consists of the Average Abnormal returns (AAR) and Cumulative Average Abnormal Returns (CAAR) of an announcement of a CEO turnover. The second part consists of the announcement of a turnover of a one-‐dollar CEO. The one-‐dollar CEO will be separated into CEO with power and CEO with less power. The third part provides the AAR and the CAAR for the regular salary CEO.

Market returns on turnover announcement

In this table you can find the average abnormal returns of a CEO announcement turnover, and its market reaction. Before the day of announcement [t-‐1], on the announcement day [t=0] and the day after the announcement [t+1]. The AAR for the day after the announcement is made, that a CEO will be replaced, has a positive AAR of 0.0014. The day after the announcement is taken, to measure the impact of the announcement. This is statistical significant with p-‐value < 0.01. This is supported by the findings of (Huson, Malatesta, & Parrino., 2004), they suggest that management turnover induces a higher expected corporate performance through increased managerial quality. These finding are also supported by (Davidson et al., 1990), where the announcement of a CEO turnover leads to positive abnormal returns. The market appreciates the announcement of a CEO turnover, leading to positive AAR after the day of the announcement.

The AAR on CEO turnover announcement on sample

Day AAR p-‐value

-‐1 -‐0.0052 6.6833E-‐71

0 -‐0.0009 4.4581E-‐07

B. Qin 17-6-13 10:35

Comment [3]: To separate the market

response to CEO turnover alone from the repsonse to one-‐dollar-‐salary news, first pool all observations (including one-‐dollar sample and regular salary sample), report AAR and CAAR, and check if there are statistically significant. After that, partition the full sample into one-‐dollar subsample and regular salary subsample (as what you have done). Finally compare the sign and magnitude of market response with different samples.

B. Qin 17-6-13 10:35

Comment [4]: However, their findings do

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This table provides the CAAR for the event. The second step is to include the cumulative average abnormal returns for the occurring event. The announcement of CEO turnover has a negative CAAR of 0.0048, with p-‐value < 0.01, this test is significant. The results are supported by (Dedman and Lin., 2002) where the negative stock price reaction may reflect the financial costs of compensating the departing CEO for loss of office, or new information that is disclosed simultaneously with the turnover announcement of the CEO leading to negative cumulative abnormal returns for the occurring event.

The CAAR on CEO turnover announcement

Day CAAR p-‐value

[-‐1] -‐0.0052 6.6833E-‐71

[-‐1,0] -‐0.0062 3.0679E-‐83

[-‐1,+1] -‐0.0048 8.3702E-‐65

Market returns and one-‐dollar CEO announcements

This table provides the result of the AAR on the announcement of a one-‐dollar CEO. The average abnormal returns for the announcement of a one-‐dollar CEO -‐0.0148, with p-‐value < 0.01, acknowledging that the announcement of a one-‐dollar CEO salary has a negative influence on the average abnormal returns of a corporation in the US at the CEO turnover announcement. All results of AAR are significant with p-‐value < 0.01. The stock market reacts negative to the news of a CEO turnover with a one-‐dollar salary.

The AAR on one-‐dollar CEO announcement

-‐1 -‐0.0251 5.4642E-‐39

0 -‐0.0101 1.0613E-‐18

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This table covers the CAAR for the one-‐dollar CEO for the event. The second step is to include the cumulative average abnormal returns for the occurring events. For the one-‐dollar CEO the CAAR for the event is -‐0.0500, with p-‐value < 0.01, indicating that the announcement of a one-‐ dollar CEO has negative influence on the cumulative abnormal returns. Both findings are supported by (Lubatkin et al.,1987) where the announcement of a CEO turnover has negative influence on the abnormal returns. The stock market does not appreciate the announcement of a one-‐ dollar CEO.

The CAAR returns on one-‐dollar CEO announcement

[-‐1] -‐0.0251 1.0928E-‐38

[-‐1,0] -‐0.0352 3.8410E-‐47

[-‐1,+1] -‐0.0500 4.4000E-‐56

The relation between CEO power and market reaction

In the next part a distinction is made between the power of a CEO within the firm, when the CEO is powerful he is coded as 1 when he has less power he is coded 0. This is based on criteria if he is a board member, the corporate governance structure of the corporation (insider or outsider type) and if he has voluntary accepted the one-‐dollar salary, or it was due pressure from the public. The paper of Charles A. Dice – why do some CEOs work for a one-‐dollar salary? Provides a list of CEOs whom voluntary took a one-‐dollar salary, the missing CEOs are found using news announcement surrounding the acceptance of a one-‐dollar salary. Orbis provided data for the governance structure and the compensation of the board. Statistics provided indicate that for both most CEOs who accept a one-‐dollar salary, are powerful. The Average is 0.65.

B. Qin 13-10-31 09:28

Comment [5]: What you mean by

governance structure. What features did you really look at? Articulate it!

B. Qin 17-6-13 10:35

Comment [6]: How did you know CEO

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Less power vs. power, one-‐dollar CEO 0 1 average 0.10 -‐ 1.45 N DF(n-‐1) 21 20 40 29 variance 0.0047 0.0075 Standard deviation 0.0690 0.0867 t-‐test 0.3148 3.7297 p value 0.3781 0.0003

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Market returns and regular salary CEO announcements

This part of the results covers the market returns on an announcement turnover for a regular salary CEO. In the average abnormal returns of a regular salary CEO announcement are provided, and how the market reacts to it. The average abnormal return after the announcement day is 0.0100, with p-‐value < 0.01. All the values are statistically significant. Indicating that the announcement of a regular salary CEO has influence on the abnormal returns in the US, on the day after the announcement day. The stock market reacts positive to this announcement and appreciates the positive AAR’s. This is supported by (Huson, Parrino, & Starks., 2001), which found positive abnormal returns with the turnover of a CEO; they suggest that shareholders assess the quality of the board on hiring a new CEO resulting in positive company performance.

The average abnormal returns of a regular salary CEO announcement

-‐1 -‐0.0010 0.0073

0 0.0011 0.0035

+1 0.0100 2.70E-‐55

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announcement of management changes. This is often due the factor that those firms are often financially distressed. However the factor of financial distress is not provided in this study.

Cumulative average abnormal returns of a regular salary CEO announcement

[-‐1] -‐0.0009 0.0146

[-‐1,0] 0.0001 0.7920

[-‐1,+1] 0.0100 1.574E-‐55

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Conclusion

This study examines the announcement of a CEO turnover and the impact of the stock market in the US between 1992 and 2013. The sample size consisted of 146 regular salary CEOs and 62 one-‐dollar CEOs. The AAR on the first day after the announcement for a one-‐dollar CEO is -‐ 1.48, with p-‐value < 0.01. This is statistical significant, thus we can accept hypothesis 1: “The announcement of a one-‐dollar CEO has influence on the abnormal returns”. However the announcement of a one-‐dollar CEO has negative influence on the AAR. The CAAR for the occurring event [-‐1, +1] has a CAAR of -‐0.005, with p-‐value < 0.01. It can be assumed that the announcement of a one-‐dollar CEO has influence on the abnormal returns; however these are negative, for the occurring event. The stock market does not appreciate the announcement of a one-‐dollar CEO.

The one-‐dollar group was divided into powerful and less powerful CEOs, based on the criteria of; public outrage, if the CEO accepted his one-‐dollar salary voluntary or did it to camouflage his real intentions. Secondly how strong or weak the corporate governance structure (insider or outsider) is, and lastly if he is a board member or not. All these factors contribute to the power of the CEO and his real intentions in accepting a one-‐dollar salary. The sample consist of 21 less powerful CEOs and 42 powerful CEOs The AAR for the less powerful CEO on the announcement day is 0.10, this is positive however it has a p-‐value of 0.37 this is not statistical significant at p-‐ value < 0.10. The powerful CEO has an AAR of -‐1.45 on the announcement day, significant at p-‐ value < 0.01. The second hypothesis was: ‘’the power of a one-‐dollar CEO has influence on the abnormal returns’’. The less powerful CEO has no significant influence on the AAR during the announcement data; however the powerful CEO has influence on the AAR. The one-‐dollar salary announcement can be a bold statement of confidence and risk seeking activities. Since the CEO will be interested in increasing the stock price in the short run. He will be risk seeking, stockholders who are risk averse will not appreciate the announcement of one-‐dollar salary (Loureiro et al., 2011). A powerful CEO can be the indication of a poor corporate governance

B. Qin 13-10-31 10:36

Comment [7]: Provide some implications

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structure or he tries to camouflage his real intention. This is supported of the negative AAR of -‐ 1.45 and CAAR on the day after the announcement.

The regular salary CEO sample has an AAR of 0.01 on day after the announcement. With p-‐value < 0.01, this is statistically significant. The CAAR for the occurring event is 0.0100 with a p-‐value of < 0.01; this is significant. The third hypothesis is: “The announcement of a regular salary CEO has influence on the abnormal returns”. This hypothesis can be accepted, with p-‐value < 0.01. The announcement of a regular salary CEO has positive influence on the AAR and the CAAR’s event window. This can be supported by the findings of (Furtado & Rozeff., 1987), when there is a change in the top management the corporation shifts a signal in the corporation’s policy, and therefore raise shareholders wealth.

This study captures the stock market reaction on the one-‐dollar salary turnover announcement. Is it a movement towards an optimal contract were the CEO aligns the shareholders interest or it is rather a move to camouflage their real intentions? Is it just a tool to avoid public outrage in extracting excessive rents? This study has shown that the stock market does not appreciate the announcement of a powerful CEO with a one-‐dollar salary. When the corporate governance structure is weak, or the CEO is a board member or he is trying to camouflage his real intentions the stock market reacts negative to this type of powerful one-‐dollar CEO announcements. The results on less powerful one-‐dollar salary CEO are not significant, however the AAR is positive with 0.10, more research should be done on this, by increasing the sample size.

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higher expected corporate performance through increase managerial quality, creating positive abnormal returns for the regular salary CEO.

AAR’s of CEO turnover, base & one-‐dollar salary

CAAR’s of CEO turnover, base & one-‐dollar salary

The tables provide a summary of the AAR’s and CAAR’s for CEO turnover and for both the regular and one-‐dollar salary and the whole sample. The stock market does appreciate the

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AAR and CAAR decrease. The stock market however appreciates the announcement of a new regular salary CEO; the AAR and CAAR are positive and increase. To conclude the answer on the research question can be provided, the research question was: “How does the stock market react to a one-‐dollar CEO announcement?” The stock market does not appreciate the announcement of a CEO turnover with a one-‐dollar salary

Limitations & further research

The limitation of this research is that it is based on press release date announcement. Inside information such as CEO turnover, can be known before the announcement is made to the public. These announcement can result in stock trading with preempt information, or it can be leaked to the public, biasing the internal validity of this research. Another bias of this research is the small sample of the one-‐dollar CEOs, with low power. This can lead to a Type II error. The third limitation is the choice of the CAMP model; it includes factors for calculating the expected return. But there are different models such as the Fama-‐French model which is more extended it includes three factors into the model the small market capitalization (SMB) and the high market ration (HML). The only factors included for this research were the market reaction on the announcement. Other factors can influence the turnover of a CEO such as the performance or the financial position which were not included.

This research can be the basis for further research on the new topic of the one-‐dollar CEO. The US has is going to accept a new bill in which the CEO has to wait to cash in his stock. This increases the long-‐term goals of the corporation, instead of short-‐term growth and increasing stock price.

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Appendix

Announcement of CEO turnover-‐ AAR

AAR -‐0.0053 -‐0.0010 0.0014

AAAR -‐0.0016

AAR-‐AAAR^2 0.000013553 0.000000405 0.000009274

Degrees of freedom (n-‐1) 206

variance 0.00001

Standard deviation 0.0027827547

N 207

AAR T-‐test t-‐test p value

t-‐1 -‐0.53% 27.39070627 6.68326E-‐71

t=0 -‐0.10% 5.068212561 4.45814E-‐07

t=+1 0.14% 7.387900857 1.82622E-‐12

Announcement of CEO turnover-‐ CAAR

CAAR -‐0.0053 -‐0.0063 -‐0.0048

CAAAR -‐0.0055

CAAR-‐CAAAR^2 0.000000031 0.000000645 0.000000392

Degrees of freedom(n-‐1) 206

N 207

[-‐1] -‐0.53% 27.39070627 6.68326E-‐71

[-‐1.0] -‐0.63% 32.45891883 3.0679E-‐83

1,+1] -‐0.48% 25.07101797 8.37019E-‐65

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Announcement of regular salary AAR

AAR -‐0.0010 0.0011 0.0100

AAAR 0.0034

AAR-‐AAAR^2 0.000018790 0.000005197 0.000043752

t-‐1 -‐0.10% 2.471623423 0.007303697

t=0 0.11% 2.735772358 0.003500577

t=+1 1.00% 25.27491185 2.70195E-‐55

Announcement of regular salary CAAR

CAAR -‐0.0010 0.0001 1.008%

AAAR 0.0031

AAR-‐AAAR^2 0.000018790 0.000010596 0.000045142

CAAR T-‐test t-‐test p value

[-‐1] -‐0.10% 2.471623423 0.014607395

[-‐1.0] 0.01% 0.264148934 0.792040221

[-‐1,+1] 1.01% 25.53906079 1.57497E-‐55

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Announcement of one-‐dollar CEO AAR

Average abnormal return -‐0.0251 -‐0.0101 -‐1.479%

AAAR -‐0.0167

AAR-‐AAAR^2 0.000070921 0.000042873 0.000003511

variance 0.000039102

t-‐1 -‐2.51% 31.07455344 5.46417E-‐39

t=0 -‐1.01% 12.5316694 1.06128E-‐18

t=+1 -‐1.48% 18.32157601 1.47469E-‐26

Announcement of one-‐dollar CEO CAAR

CAAR -‐0.0010 0.0001 1.008%

AAAR 0.0031

AAR-‐AAAR^2 0.000018790 0.000010596 0.000045142

CAAR T-‐test t-‐test p value

[-‐1] -‐0.10% 2.471623423 0.014607395

[-‐1.0] 0.01% 0.264148934 0.792040221

[-‐1,+1] 1.01% 25.53906079 1.57497E-‐55

CEO power and the announcement of a one-‐dollar CEO

The impact of an announcement of a one-­‐dollar CEO on the stock market