What A Change In The Corner Office Means For India Inc. On Dalal St.

When Krithi Krithivasan takes the helm of Tata Consultancy Services Ltd. from Rajesh Gopinathan on June 1, he’s unlikely to be greeted with an adverse reaction on the Dalal St.

At least that’s what Jefferies has found out.

A change in the corner office is unlikely to have a bearing on a large listed company’s stock performance, an analysis of 72 CEO changes over five years showed. Moreover, external hires seem to have had a positive impact on stock prices in several cases.

“The impact of CEO transition is fairly even for stocks, with about half (53%) of the events not producing any change in the relative performance of the stock—stocks outperforming leading up to the transition continued to outperform post transition as well,” said Mahesh Nandurkar and Abhinav Sinha, equity analysts at Jefferies India Pvt. Ltd., in an April 12 research report.

In cases when the stocks reversed the performance, 68% of the changes were for the better—an underperforming stock became outperforming within six months of the transition.

Interestingly, large companies are more likely to choose an internal candidate as their next leader, as compared to midcap and smallcap firms. According to the Jefferies analysis, 55% of the smaller companies surveyed opted for an external candidate to take the helm, as compared to 40% at their larger peers.

Over the next 12 months, corner offices of several large Indian firms—representing nearly half-a-trillion dollars in market capitalisation—are likely to find new occupants. And the reasons for the exits are myriad: resignations (TCS), superannuation (Tech Mahindra), mergers (HDFC) as well as generational change in leadership (Reliance Industries).

“While the pandemic saw CEO transitions take a back seat, businesses are now dealing with changed macro/geopolitical situations,” Jefferies stated in the report.

Jefferies analysed the 72 listed companies for their relative performance over a six-month period from the “zero date”, which is one month prior to the actual announcement of the change in leadership.

The list excludes those companies in which promoters are actively involved in management and also most public sector undertakings, where such changes are government-directed and fairly routine.

“To analyse the stock impact, we look at its relative performance over a +/-6-month period from the ‘zero date’,” Jefferies stated in the report. “We believe over longer terms, multiple other factors can influence stock performance and hence excluded.”