Stocks tend to tank on top-level exits

When Wipro suddenly announced on January 21 that both its joint CEOs — Mr Suresh Vaswani and Mr Girish Paranjpe — had decided to step down and the two would be replaced by Mr T.K. Kurien, its scrip was battered the next trading day. The price went down from Rs 469.8 (opening) to close at Rs 444.35 on January 24, a fall of 5.6 per cent while the market as a whole went up by 0.76 per cent.

The same thing happened to Jindal Drilling, when its Managing Director, Mr Naresh Kumar, was sacked by the board of directors for having lost confidence in his leadership on September 24, 2010. Though the company communicated this to the exchanges at 4 p.m. after the markets had closed, the stock price went southwards for the next two trading sessions.

If the development is accompanied by a whiff of controversy as in the case of the exit of Mr S. Gurumani of SKS Microfinance, the adverse reaction can be severe. The share price fell from a high of Rs 1,390 on October 4 to close at Rs 1,259.20 on October 5.

One does not have to be an iconic CEO such as Mr Steve Jobs of Apple Inc, whose break from work due to illness saw the company's stock price sharply correcting itself at the Nasdaq, for an adverse market reaction to the exit of the CEO. Sudden top management changes in corporates have always had a negative impact on scrip prices on the bourses, say market experts. This is true even if the changes were positive in an overall sense.

But not all exits are bad news for the market. In the case of Ashok Leyland, traders sold the stock until 3 p.m. when news came of Mr Vinod Dasari replacing Mr R. Seshasayee as the Managing Director. Then, on realising that the development was a positive, traders started to buy into the scrip which eventually closed in the green on January 24.

Expert opinion

Analysts say that while it would be fair to say that the new incumbents need time to prove themselves, the fact remains that market tends to take a bearish view as and when such events happen.

“The ability to communicate decisions properly is what is what differentiates companies,” said Mr Mansingh Deshmukh, Head, Equity, JHP Securities. “Good companies (such as Infosys Technologies) gradually communicate any change at the helm.

When marketmen are convinced that such changes do not mean drastic changes in strategy there, they react positively,” he said.

Good managements can make or break the future potential of a company, say market experts.

“It is also seen that companies rarely communicate the rationale for any sudden changes at the top and as a result, volatility in stock prices is a given,” said Mr Sameer Kamdar, CEO, ASK Investment Managers.

Chartists have a different view on such events.

“Aggressive traders in the stock market usually buy on rumours and sell on news,” said Mr Rakesh Gandhi, Technical Analyst, LKP Securities.

While the immediate reaction could be negative in the short run that should hardly matter for companies with fundamentally sound business models, say experts.

“Long-term investors remain invested in strong companies and blips such as these do not bother them,” concluded Mr Deshmukh.

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