The reaction of stock investors to the CFO skills

Abstract

This study investigates the effects on stock returns of appointing Chief Financial Officers (CFOs) with more experience than their predecessors. A look is taken to the market reactions to the appointments of both previous and current CFOs and their skill levels through the use of event studies and cross-sectional data. The examined sample covers 100 US companies from the S&P 500 index. Within separate tests on the average CARs for each appointment type, it was found that the two average CARs during the event windows were significant, despite the statistical insignificance found on the average of the differences in the two mean CARs. At a 33.9% confidence level, an OLS model that controlled for firm financial indicators, the 3 Fama and French factors, and three firm governance variables discovered a statistically insignificant but positive association between the differences in stock reactions and CFO qualifications between the two points of time of hiring. At an 8.8% confidence level, the results also show a strong positive market response for successors who hold board director positions and appear a growing dominance in skill sets over their predecessors. Overall, this research advances our knowledge of senior roles in corporate finance by indicating that strategic CFO appointments have an impact on stock performance and business valuation.