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IMPACT OF CEO CHANGE ON MARKET VALUES



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IMPACT OF CEO CHANGE ON MARKET VALUES A Bruce Clark Ph D Texas Southern University P O Box 218655 Houston TX 77218 281 579 9103 Abstract Because conventional financial reporting failed to prevent Savings and Loans Crisis of 1988 the market value concept became popular To see if CEO changes effect how much companies are worth if sold public corporations were examined from 1997 to 2001 The findings show that companies with CEO changes see sharp subsequent year drops in market values i e relative to other corporations used as a benchmark due to asset write downs These results suggest 1 executives looking for bargains on assets should target competitors with recent CEO changes and 2 new CEOs in their zeal to get a clean slate should carefully liquidate questionably productive assets to prevent hostile takeover attempts INTRODUCTION Because conventional financial reporting failed to prevent the Savings and Loans Crisis of the late 1980s Brainard Shapiro and Shoven 1990 highlighted the need for a market value orientation Specifically they measured a company s health as the sum of the market values of its preferred stock common stock and debt less net short term financial assets valued at par where the debt was estimated from book values interest payments and maturity structure Thus they estimated price tags at which firms i e goods can be bought and sold which is consistent with the definition found in a recent article by Abdeen and Haight 2002 Subsequently other researchers emphasized the need for these price tags Perkins and Van Zyl 1994 stated that the corporate manager s most important task today is to maximize the current market value of the business They then go on to say that to achieve this companies must move away from traditional financial goals performance measurements and valuation procedures Likewise Frieder and Hedges 1994 concluded that market value is the ultimate measure of performance which may explain why this nation s largest public companies boards of



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