Mendoza School of Business

Why CEOs Matter Even More Than They Used To

Published: April 12, 2016 / Author: Will Yakowitz, Inc.

When Apple co-founder Steve Jobs died in 2011, the company’s stock immediately dropped. That was one of many examples of how markets can act like living, breathing, emotional creatures in reaction to a company leader’s death.

The effect such an event has depends on whether the CEO is perceived as a formidable leader or a poor leader. A study from Notre Dame University and University of Georgia finds that following the unexpected death of a CEO, a company’s market cap increases or decreases by $65 million more than it did 60 years ago.

Notre Dame professor Craig Crossland and University of Georgia professors Timothy Quigley and Robert Campbell looked at all 240 U.S. public company with CEOs who died suddenly between 1950 and 2009. The average firm in the sample had a market cap of $1.3 billion.

Crossland says the increased market reaction is due to the rise in what is called the CEO effect, or the impact a CEO has on a company’s bottom line.”When a CEO who is seen as ineffective dies, there is a positive reaction. It sounds a bit macabre but the market sees this as a good thing,” Crossland says. “But when you have a great CEO, a lucky and effective CEO, and he or she dies unexpectedly, you get a negative reaction.”

“CEOs matter more than they used to, for good and for ill,” Crossland says.

Read the entire story on the Inc. website.