The effects of a CEO's death on stock performance

Stock in candy company Tootsie Roll Industries rose nearly 13 percent in the week following the sudden death of CEO Melvin Gordon last year.

That's not unusual. Since the 1950s, almost half the time a CEO dies unexpectedly, investors react by pushing the stock up. From 1990 to 2009, reaction following CEO deaths brought nearly 9 percent in average unusual returns. That's according to researchers from the University of Notre Dame and the University of Georgia.

Their paper was just published in the Strategic Management Journal and cited in a report by Quartz.

It looks like investors looking to make a quick — if slightly morbid — buck could benefit by going long on hearse-driven stocks. For corporate boards, the research shows that developing a clear succession plan is increasingly important.

That trend has been increasing in recent decades. Looking at U.S. public companies between 1950 and 2009, the researchers found 240 instances of CEOs dying suddenly, distributed pretty evenly through the period of study. (They eliminated deaths from long-term illnesses and the like.) The research shows that investors have reacted more sharply in recent years than they used to when a CEO died.

The research was designed to assess shareholder perceptions of CEOs' impacts: A company CEO is often the face of the company. But could the same company see the same performance with someone else at the helm? It's a question that's vexed many corporate boards and investors alike.

Their unique and macabre research method is focused on the stock return of companies following a CEO's unexpected death.

"Our results indicate that shareholders act in ways consistent with the belief that CEOs have become increasingly more influential in recent decades," they wrote. In plain English, that means that investors react more to a CEO's death now than they used to.

Funeral and a casket, people attending
Terry Vine | Getty Images
Funeral and a casket, people attending

Even after controlling for factors like market cap and the age of the firms, they found that market reaction increased over the years.

"The average firm in our sample had a market capitalization of $1.3 billion (in 2009 dollars)," they wrote. "Thus, over the course of 60 years, the shift in market value caused by an unexpected CEO death increased by approximately $65 million."

Breaking the study's 60 years into three segments, the researchers also looked at how investors' reaction to sudden CEO deaths had changed in terms of direction. The direction hasn't changed significantly: Around 40 percent of companies rose in the days following a sudden death from 1990 to 2009, similar to previous periods.

While the number of abnormal returns hasn't really changed to positive or negative, the positive reaction itself has become even more pronounced. That means that when investors buy after a CEO passes away, they buy more than they would sell. Positive abnormal returns increased more dramatically than negative abnormal returns.