I’ve always argued that the stock market is the world’s largest experiment in mass hypnosis. And now comes new academic research that is grist to my cynical mill.
There’s new evidence that the stock market is becoming more susceptible to the cult of the chief executive officer: “Shareholder Perceptions of the Changing Impact of CEOs: Market Reactions to Unexpected CEO Deaths, 1950-2009,” published in the latest issue of the Strategic Management Journal.
Timothy Quigley and Robert Campbell of the University of Georgia, and Craig Crossland of Notre Dame, looked at stock market reactions to the sudden deaths of 240 company CEOs over the postwar period. And they found that those reactions, on average, rose strongly over the period.
During the 1950s and 1960s, the sudden death of a CEO accounted for, on average, a 3% change in the stock price over the subsequent three days. By the 1990s and 2000s, that had risen to almost 8%. To the casual observer, this may not sound like much, but every 1 percentage point change in the stock price of even of a smallish company on the equity market is equivalent to $10 million. For bigger companies, those movements can add up to a small fortune.
This ingenious project is a little key that unlocks a big door. By looking at quick reactions to sudden deaths, the authors isolated how much faith the mass of investors are placing in the power and importance of a single “great leader” to determine the fate of a large and complex organization.