Financial History 134 (Summer 2020) | Page 29

TABLE 1: Market Impact of Events Generating Sudden, Extreme Uncertainty Event Next market date 1 day ret (DJIA) Pearl Harbor attacks Dec 8–9, 1941 –6.30% (2 days) Beirut Marine barracks bombing 23-Oct-83 0.10% WTC truck bombing 26-Feb-93 1.00% Oklahoma City bombing 19-Apr-95 0.70% Khobar Towers bombing 26-Jun-96 –0.64% Kenya & Tanzania Embassy bombings 7-Aug-98 0.24% Monday after 9/11 17-Sep-01 –7.10% Bank bailout (TARP) rejected 29-Sep-08 –7.00% Trump: “Coronavirus may last until August” 16-Mar-20 –12.93% unexpected resignations among key executives … maybe you should go too.” Most individuals do not leave a high-paying position they’ve spent decades jostling for under unremarkable circumstances. While numerous factors influence the market reaction (such as the stock performance under their tenure, the existence of a clearly defined succession plan, etc.), consider a few such studies. Fortune (2019) reports that “companies whose CEOs departed saw their stocks’ returns drop an average of 4.19% in the 30 days following compared to the S&P 500.” Larcker and Tayan (2012) cover 12 CEO deaths between 1994 and 2012 and report that the stock price on the day of the executive’s death fell by 2.01% on average. And Salas (2010) indicates that the sudden death of a CEO leads the stock price to fall immediately by 0.64% on average. –3.55% and one day after. It is even larger, −3.9% or −10.3%, if the resigning director is an insider. Worell, Davidson and Glascock (1993) find a statistically significant price increase of 2.3% in the case of forced resignations, no doubt indicating that in those cases, investors were relieved and looked ahead to an improved future. Context, as always, is pivotal (see Table 2). III: Removal of a US President (Outside Term of Office) In addition to general uncertainty and fears arising from the removal of any key decision maker, the impeachment of a US President introduces worries unique to the circumstances surrounding the removal of an elected official with significant influence over both the United States and the world at large—not only economically but geopolitically. Domestically, the impeachment introduces significant uncertainty surrounding such executive powers as the veto, the ability to issue executive orders, the tenure of Cabinet appointees, the possible abruption of policy initiatives and so on. The unscheduled exit of a President may occur for several reasons besides impeachment: resignation, assassination or invocation of the 25th Amendment (concerning inability “to discharge the powers and duties of his office”). I now consider the stock market returns associated with these types of episodes. Resignation The day after the August 8, 1974 announcement of Richard Nixon’s resignation, the Dow Jones Industrial Average fell 1.3%. (An important side note: by September 1, 1974, the index had fallen over 15%.) Assassination Attempts Several weeks before his inauguration in early 1933, an attempt was made on the life of Franklin Delano Roosevelt. Although he was unhurt, equities fell by slightly over 2% the next day. In September 1975, two assassination attempts were made against Gerald Ford. In the first, undertaken by former Mansonite Lynnette “Squeaky” Other Corporate Executives The impact upon stock prices of the resignation or termination of other managers depends largely upon the circumstances leading up to the change. Agrawal and Chen (2008), for example, report that “stock prices decline significantly (both statistically and economically) upon news of these events” and that “firms [with internal management disputes] have poor operating performance in the years surrounding the dispute episode, and experience significantly greater incidence of stock market delisting in the years following.” They find that the cumulative average abnormal return is −2.6% between the day before the episode and the day after and –6.1% between 10 days before An engraving showing the impeachment trial of President Andrew Johnson in the Senate, March 13, 1868. Library of Congress www.MoAF.org | Summer 2020 | FINANCIAL HISTORY 27