Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

Successor Is

Insider

Successor Is Outsider

Forced

CEO

turnover

Increase in

likelihood of

change but no

immediate policy

Most likely to change

management policy and to

increase likelihood of future

change in management change

A forced CEO change increases the likelihood of
managementchangeinthefuturebecauseitsuggeststhatthe
board of directors will actively challenge management.
Choosinganoutsiderasareplacementismorelikelytolead
to a changein current management policies. Theexpected
valueofcontrol,whichistheproductofthetwo,islikelyto
beincreasedthemostwhenanexistingCEOisforcedoutand
an outsider is hired.

Corporate Governance

Gompers, Ishi, and Metrick (2003) studied the effect of
corporate governance on stock prices by developing a
corporate poor governance index,based on 24 factors, for
1,500firms;higherscoresontheindextranslatedintoweaker
corporate governance.
47 Theyfoundthatthestockswiththeweakeststockholder
powerearned8.4percentlessinannualreturnsthanstocks
withthestrongeststockholderpower.Theyalsofoundthatan
increaseof 1 percentinthepoorgovernanceindextranslated
intoadeclineof2.4percentinthefirm’sTobin’sQ,whichis
theratioofmarketvaluetoreplacementcost.Thefactthat
poor corporate governance is correlated with poor stock
returns and lower stock prices is by itself not conclusive
evidencethatthereisanexpectedvalueofcontrolbuiltinto