Market Reaction to new CEO announcement

On 21st Nov, Indian generic drug maker Cipla Ltd. announced its plans to acquire South African firm  Cipla Medpro. Subsequent to the announcement that is likely to boost its prospects in Africa, and is expected to be accretive to earning, Cipla Ltd. shares rose by more than 3 % after the announcement and were trading at Rs 390 on NSE.

On 22nd Nov, Cipla Ltd announced the appointment of Mr. Subhanu Saxena as Chief Executive Officer. Mr. Saxena has rich work experience of over 25 years, in industries as varied as FMCG, consulting, banking and pharmaceuticals. Following the announcement of the appointment of new CEO, Cipla share fell down during the day while the NIFTY index showed a upward movement. Cipla share price clearly did not follow the pattern in sync with the movement of NIFTY. 

This weak movement of the share price on 22nd Nov could have something to do with the announcement of new CEO appointment. Generally some market reaction is expected around the announcement day of a CEO appointment. In considering CEO candidates, boards of directors and selection committees are almost always concerned about the market reaction on the company’s share price.

At times markets tend to react unfavourably to the announcement of a new CEO, as investors may anticipate some amount of uncertainty involved with the change in CEO. There are other instances when there have been positive abnormal returns around the announcement of an outside CEO appointment. In such cases, results suggest that new outsider CEO appointments can be considered as beneficial to investors because they bring in knowledge from other organizations and can objectively evaluate and challenge the current strategy of the company and incorporate new and fresh ideas

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Though the initial market reaction is in anticipation of  the CEO’s likelihood of success, however a  latest research by HBR shows that there is no positive correlation between how a company’s stock fares upon the announcement of a new CEO and the share price over that CEO’s tenure so the initial market reaction should not be considered an indicator of the CEO's likely performance.

Irrespective of the initial market reaction, it will only be evident over a period of time how the new CEO steers the Cipla towards higher levels of growth and creates value for the shareholders.