Bad news for announcers, good news for rivals: Are rivals fully seizing transition‐period opportunities following announcers' top management turnovers?

• Author: Juliane Proelss,Utz Schäffer,Cord H. Burchard,Denis Schweizer
• DOI: http://doi.org/10.1002/smj.3234
• Date: 01 March 2021
• Published date: 01 March 2021

RESEARCH ARTICLE

Bad news for announcers, good news for rivals:

Are rivals fully seizing transition-period

opportunities following announcers' top

management turnovers?

Cord H. Burchard

1

| Juliane Proelss

2

| Utz Schäffer

1

|

Denis Schweizer

2

1

WHU –Otto Beisheim School of

Management, Institute for Management

Accounting and Control (IMC),

Vallendar, Germany

2

John Molson School of Business,

Concordia University, Montreal, Quebec,

Canada

Correspondence

Denis Schweizer, Professor of Finance,

Concordia University, John Molson

School of Business, 1455 de Maisonneuve

Blvd. West, Montreal, Quebec H3G 1M8,

Canada.

Email: denis.schweizer@concordia.ca

Abstract

Research summary: This study analyzes whether and

how the disruption of top management turnovers can affect

not only turnover firms but also their intra-industry rivals. It

thusaddstotheliteratureonbothleaderlifecyclesandcom-

petitive dynamics. Using a U.S. sample of 857 CEO turnovers,

we find a period of relative stagnation for announcing compa-

nies following top management turnovers. We also find that

intra-industry rivals can use this period to their advantage.

Semi-structured interviews with seasoned CEOs, CFOs, and

a board member from large publicly listed firms, as well as

an extensive news search, support this notion. Intra-industry

rivals gain a competitive advantage that can result in positive

abnormal stock returns and accounting performance. The

intra-industry outperformance is greater for forced turnovers.

Managerial summary: The departure of a company's

CEO, forced or not, is usually a disruptive event for a

company, as the successor must adapt to the new envi-

ronment before undertaking any major strategic

changes. Rivals can seize an opportunity during the

transition period of the announcing company because

they remain fully operational. They can thus actively

exploit the relative inability of turnover companies to

react by, for example, launching sales initiatives or

increasing M&A activity. This interpretation is

Received: 5 June 2012 Revised: 14 June 2020 Accepted: 17 August 2020 Published on: 22 September 2020

DOI: 10.1002/smj.3234

Strat Mgmt J. 2021;42:579–607. wileyonlinelibrary.com/journal/smj © 2020 Strategic Management Society 579

supported by internal and external evidence. Investors

on average also recognize this situation, and stock

prices react accordingly.

KEYWORDS

competitive dynamics, information effects, intra-industry effects,

leader life cycle, top management turnover, transition period

1|INTRODUCTION

When CEO turnovers occur, they tend to be overly disruptive for companies (Ballinger &

Schoorman, 2007; Burns, 2003; Grusky, 1960). In addition, successors face significant challenges

during the transition period. They must adapt to new processes, learn position- or firm-specific

skills, and potentially adjust to having greater levels of responsibility (Harris & Helfat, 1997).

New CEOs may need to establish credibility with the management team, as well as with the

supervisory board and other stakeholders (Greiner, Cummings, & Bhambri, 2003).

This process is usually quite time-consuming, and the new top manager may be prevented from

focusing on future strategic goals and actions during that time (Gabarro, 1987; Shen, 2003). The

result is a period of relative stagnation, which can be a competitive disadvantage. Studies have

shown that, no matter how well new top managers perform at the beginning of their tenure, they

are unlikely to deliver substantial strategic enhancements (Wowak & Hambrick, 2010). At the same

time, turnover events may convey material information to intra-industry rivals, for example, the so-

called information effect (Firth, 1996). Because rivals remain fully operational during the transition

period, they can take advantage of the turnover company's relative inability to react (Ferrier &

Lyon, 2004; Ferrier et al., 2002; Miller & Chen, 1994, 1996). This comparative advantage should be

valued positively by the capital markets, and should result in positive stock price reactions for intra-

industry rivals until the transition period ends (Ferrier & Hun, 2002).

For an example of an intra-industry reaction, consider the departure of Vaughn Bryson as

CEO of Eli Lilly and Company, who retired after a dispute in 1993. He was replaced by Randall

L. Tobias, CEO of AT&T International and a member of Eli Lilly's Board. Tobias was considered

an ideal choice because of his experience in a major company that had undergone complex

changes. He eventually proved to be the most successful CEO in the company's history, increas-

ing its market value from $14 billion to $70 billion during his tenure. Although Tobias had

insight and knowledge from serving on the board, Lilly's stock price reacted negatively to the

announcement. It went on to strongly lag the pharmaceutical market. In fact, during the

3 months after his appointment, it decreased by 2.4%, while the pharmaceutical market

(Allergan, AZZ, Bristol-Myers, Eli Lilly, GlaxoSmithKline, Johnson & Johnson, Merck, Pfizer,

AstraZeneca PLC, and Novartis) gained 3.3% on average, resulting in a 5.7% underperformance.

However, the stock price rebounded and caught up during the following 6 months.

The pattern behind this stock price reaction can largely be explained by competitive moves

in the pharmaceutical market. Shortly after the CEO turnover, Lilly's rivals began announcing

strategic alliances, merger activities, and development agreements (positive information effect;

see Reuters News, 1993a,b; Guardian, 1993; and Factiva Press Release Service, 1993). At the

same time, Tobias, as the new CEO, was still in a “settling-in”phase, and was facing massive

unsolved challenges stemming from the 1993 Clinton healthcare initiative. This created a

580 BURCHARD ET AL.