How does an appointed CEO influence the stock price?
A Multiple Regression Approach
Written by C. A. Jönsson, E. Tarukoski
Thesis: Management framework In order to explain how data is formed, it must first explain the most important basis of the CEO's role from an internal and external perspective. 2.2.1 The role of the CEO The CEO is responsible for overall business operations and is elected by shareholders and the board of directors. Shareholders and the board of directors determine the expectations of the company, and based on the performance, decide whether the CEO will stay or leave at the annual general meeting. In smaller companies, the CEO is often involved in the day-to-day operations of the company. In larger listed companies, the position of the CEO is more of a leadership, decision-making, and motivational role, rather than often participating in daily work—daily operations. Instead, the CEO manages the company's standard and overall strategic growth plans, while acting as the leader of various managers and department heads, and then executes these plans. The CEO decides how to organize the company and the positions of key directors and executives to help the company achieve its goals. Employees drive the company in one direction based on the strategy decided by the CEO and the board of directors.  2.2.2 Corporate governance Corporate governance is a category in the field of corporate finance. The goal of corporate governance is to maximize the value of the company, subject to certain constraints and conflicts between different stakeholders, and make use of corporate decisions. For the CEO, this means that he or she must deal with pressure from shareholders, bondholders, society, and financial markets to maximize the value of the company. In order to achieve the goal of maximizing the company's value, the CEO can try to maximize the stock price, or equivalently, maximize the value of the company's equity. In perfect conditions, the financial market is efficient, which means that all information is available to all parties, and the market responds to good/bad news in a “logical” way. In this case, the CEO (manager) has a relatively straightforward job in the corporate governance of his position. If the financial market is efficient and all information can be provided to all sectors, then shareholders, bondholders and society will be relatively easy to please. The perfect scenario for corporate governance is shown in the figure below. In reality, corporate governance is an extremely difficult aspect of the CEO's mission. The inefficiency of the financial market, coupled with the greed for money and power of bondholders, shareholders, and the board of directors, makes it almost impossible to achieve the goal of maximizing the company's value without benefiting one party at the expense of the other party. . The real world scene is shown in the figure below. Finally, company management may choose their goals based on their current situation. 2.2.3 Agency problems If there is a conflict of interest between the CEO and the company's target functions, serious inefficiencies may arise. For example, if the CEO knows that acquiring a company will increase the company's health but will cause him or her to lose his job, then the CEO may use the company's cash to initiate a stock buyback. This means that the CEO puts his or her potential interests and safety above the main interests of the company and its shareholders. One way to solve the agency problem is to combine the interests of the CEO with the interests of the company. This can be achieved by linking CEO compensation to stock prices. The advantage of this is that the CEO now has a stronger incentive to increase the value of the company's stock. On the other hand, the main consequence will be that the CEO will be more difficult to get rid of because he or she will be more closely connected with the company because of the ownership of the shares. [17,Chapter29: Corporate Governance] If the agency problem becomes severe, the shareholder’s response may be to vote “no” to the CEO at the annual meeting, or even suggest alternative leadership and competition. 2.2.4 Leadership is regarded as a panacea. It can be used to deal with almost all kinds of social problems. All over the world, middle managers are complaining that if senior managers can play a "strong leadership role", their companies will flourish. Leadership is not a concrete thing, but only exists in the relationship between the participants, in their consciousness and imagination. Leaders have power, and if they lose legitimacy, they will also lose the power and ability to lead. There is a difference between being a leader and being a manager. It can be understood as "executors do the right thing, the leader does the right thing", that is, the manager focuses on execution and the leader focuses on the goal. Management is mainly a question of structural planning, organization and control. Leadership is a change-oriented process that involves creating a vision and building networks and relationships. The difference between leadership and management can be explained through some dimensions. Leaders have a long-term view, aiming their attention outwards and inwards, while also affecting people outside the formal jurisdiction. They emphasize the importance of vision and innovation, and possess sufficient political skills to deal with the needs and challenges that arise when there are multiple stakeholders. Leaders are not self-sufficient independent actors. They are both shaped and shaped by the stakeholders they represent. It may be tempting to compare leadership with higher positions within the company, but it means letting those who are further down the hierarchy play the role of passive successors. Read Less