When an Executive Departs: An Informational Content Story

Information about an executive's decisions at his/her former employer can have a significant impact on the stock returns of his/her current employer, even after the job change occurs. In this article, we analyze transfers of information, which, we argue, reflect executive decision-making ability as executives change jobs. We examine information about restructurings and write-downs at the new employer emerging after the executive has left an employer that indicates the executive is of lower ability than investors had expected at the time of the hiring. Our results show that such signals are associated with significant negative returns to the current employer's shares, particularly for within-industry job changes. We distinguish between restructurings at firms with and without departing executives and find that following an executive's departure, firms that had executives depart experience negative market reactions.