The Market Reaction to Votes of Confidence for Embattled CEOs

Abstract

Investors rely heavily on a CEO’s ability to execute effective strategy and deliver shareholder value. When companies falter, many investors question whether the blame rests on the firm’s CEO.  This paper examines what happens when boards rally around their besieged CEOs by formally taking a vote of confidence.  We find that there is a significant negative market reaction to the vote event. After the vote, we find that shorting activity rapidly diminishes, stock underperformance slowly dissipates, and profitability underperformance narrows.  These patterns seem to indicate that such votes of confidence were eventually proven correct.

Keywords: Vote of Confidence; Market Reaction; Short Interest; Leadership