# C a s e 2 2 . 3 C22-03 How does the death of a key executive affect a company? This question was…

C a s e 2 2 . 3

C22-03 How does the death of a key
executive affect a company? This question was addressed by two researchers. In
particular, they wanted to know how the stock market would react to the deaths
of the chief executive officer (CEO) and/or the chairman of the board of
companies whose shares trade over the counter. A sample of 21 companies whose
CEO or chairman died during a 17-year period 1986 to 2002 was selected. For
each company, the weekly share returns were recorded for the 55 weeks prior to
the executives deaths and for five weeks after. A market model (see Case 18.6)
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C a s e 2 2 . 3

C22-03 How does the death of a key
executive affect a company? This question was addressed by two researchers. In
particular, they wanted to know how the stock market would react to the deaths
of the chief executive officer (CEO) and/or the chairman of the board of
companies whose shares trade over the counter. A sample of 21 companies whose
CEO or chairman died during a 17-year period 1986 to 2002 was selected. For
each company, the weekly share returns were recorded for the 55 weeks prior to
the executives deaths and for five weeks after. A market model (see Case 18.6)
was used to determine expected returns, and the difference between the actual
and expected returns was calculated (abnormal returns). The abnormal returns
for each company for the periods three weeks prior to and one and five weeks
after the death are shown in the accompanying table. Under stable conditions,
the average abnormal return should equal zero, and we should observe an equal
number of positive and negative abnormal returns. The researchers believed that
in the weeks before the deaths (t = _3, _2, _1), the abnormal
returns would indicate stable conditions. However, after the deaths (t = 0, 1,
2, 3, 4, 5), they would exhibit the effects of bad news  the abnormal returns
would be negative. What conclusions can you draw from the data?

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