Event studies measure the changes in security price in response to a particular event. A single event study typically analyzes the average security price reaction to instances of the same type of event experienced by many firms. There are many set of events such as stock splits, earning announcements, merger or takeover announcements, regulatory change and others. In this research paper, we are going to describe the event study of announcement on CEO changes to the share price of Genting Berhad which will be more focus on the part of top management changes. Top management changes is defined as the changes of the individual that holding the title of Chief Executive Officer (CEO), chairman or president in an organization to manage the people-side of business change to achieve the required business outcome. According to the theory of internal control mechanism, the performance of an organization will be improved after the top management changes decision has been executed. Before the event study analysis, event window has to be first determined. Event window is defined as a period over which the event occurs. We have decided to analyze the share price changes for the periods of 30, 60 and 90 days before and after the announcement of CEO changes for Genting Berhad.
Research Background
According to the Wikipedia (2010), Genting Group is the trading name of Genting Berhad, it was established in the year of 1964 by Malaysian entrepreneur Tan Sri Lim Goh Tong. Genting Berhad is listing in the main board of Kuala Lumpur Composition Index (KLCI), which only have thirty companies that are qualified based on their performance. It has a strong fundamental in finance and act as a financial source to the economic. This has become the reason of this research to be examined. Genting Berhad is the investment holding and management company of Genting Group which publicly listed on Bursa Malaysia and it is made of five listed companies that include Genting Berhad, Genting Singapore PLC, Genting Malaysia Berhad and Genting Plantations Berhad. Genting Group was founded by the late Tan Sri (Dr.) Lim Goh Tong in 1965 when he began the initial development works of building a 20-kilometres private access road, across tough mountainous terrains from the foothills to the summit of Mount Ulu Kali, located at 2,000 metres above sea level. The shares of Genting Berhad were listed on the Main Market of Bursa Malaysia Securities Berhad in 1971. A restructuring exercise was undertaken in 1989, which involved the initial public offering and listing of Genting Malaysia Berhad on Bursa Securities and resulted in Genting Berhad’s becoming an investment and management company. The founder of Genting Group, Tan Sri Lim Goh Tong has retired as a Director and the Chairman of the Company with effect from 31 December 2003 and resolved that the President and Chief Executive, Tan Sri Lim Kok Thay be appointed to assume the role of the Chairman of the Company with effect from 1 January 2004. Tan Sri Lim Goh Tong was a prominent wealthy Malaysian Chinese businessman. He was renowned for his vision and courage in transforming Genting Highlands from an unexplored hilltop into one of the world’s most successful casino resorts. He is also a Director of Kien Huat Berhad and the Chairman of Lim Foundation, a charitable foundation established by him and his family. Tan Sri Lim Kok Thay is the current Chairman and Chief Executive for the Genting Berhad. He has obtained the Bachelor of Science Degree in Civil Engineering from the University of London in 1975 and also attended the Program for Management Development at the Harvard Graduate School of Business in 1979.. Besides that, he is the Chairman, President and Chief Executive of Resorts World Bhd, the Joint Chief Executive and a Director of Asiatic Development Berhad and the Chairman of Genting International PLC. He is the Chairman, President and Chief Executive Officer of Star Cruises Limited. In addition, he sits on the boards of other Malaysian and foreign companies. He has served in various positions within the Group since 1976. He also sits on the Board of trustees of several charitable organisations in Malaysia.
In the year 2010, the Genting Berhad had made an announcement regarding the company performance for the year ended 2009. The announcement was reported that the profit of Genting Berhad has been declined for the previous year. According to the announcement on February 25 from Bursa Malaysia, the stock price is stated RM6.31 per share. Before the announcement is being announced, the stock price is facing declination. On the other hand, the stock price is still dropped after the announcement is being made. However, it did increase after five days of the announcement. In this research, we will further evaluate and examine the other type of announcement which is top management changes. Genting Berhad is made an announcement of the change of top management of Genting Berhad from their founder, Tan Sri Lim Goh Tong to his son, Tan Sri Lim Kok Thay on December 31, 2003.
1.2 Problem Statement
When there is some change, development, announcement that may produce a relatively large change in the price of the asset over some period, we need to carry an event study to determine the relationship between these events and the share prices of a company. There are many research have been carried out on event studies for several events. Most of the researchers are focus on the yearly, quarterly, etc basic on the examination of how event risk affect the stock price, however, they had neglected the fluctuation of stock price on daily basis. Therefore, it come the motivation for us to examine on the sensitivity of the stock price at the case of changing of top management. Besides that, there are also different periods in the event windows which determined by researchers in their event studies. For example, same event studies for the same event will not observe the share price for same period.
1.3 Research Objective
General Objective
In general, the share price of a firm will be affected when there is announcement from the company regardless of good announcement or bad announcement. The announcement on CEO changes by different companies therefore may be favourable news to some investors or unfavourable news to the other group of investors. Different groups of investors tend to have different point of views on this event. As a result, the general objective of this research paper is to examine the effect and reaction of the stock price towards an event. It will analyze the present or future impact of a particular announcement or significant event related to a firm or a financial market. An event study tries to determine whether that event already has, or will have a statistically significant effect on the firm or market such that it will affect its financial standing or performance. In addition, the purpose of the research is to capture the price effect towards the announcement which occurs before and after the announcement had been made.
Specific Objective
In specific, this paper is aims to investigate the probability gaining an abnormal return from the event by the investors on the Genting Berhad. Events may include mergers, dividend announcements, company earnings announcements, interest rate increases, lawsuits and others which can contribute to an abnormal return. However, this research will put more attention on the daily basis on evaluate the effect of stock price changes to the changes of top management. We will examine the 30days, 60days and 90days before and after the announcement being made. The purpose of extending the examination period is to test the sensitivity of the stock price in accurately. It helps to examine the relationship in order to gain difference between the expected return of a security and the actual return.
1.4 Research Questions
Based on the previous research, it stated that there are inverse relationships between changes of top management and stock price. However, the period and the field that examined in this research will be slightly different with previous researcher. Thus, the result will be challenged. Therefore, there are some questions: Does the changes of top management affect stock price? By carrying out the event study on effect of CEO change for the share price, we are able to predict the direction of the price. In an efficient market, all available information always reflects the share price. However, the stock market of Malaysia, Bursa Malaysia is a semi strong market which the historical data and publicly available data already reflect in the share price. So, this research paper is subjects to whether investors are able to earn high abnormal return by using the information about change in CEO.
1.5 Hypotheses of the Study
Event studies usually start with the hypothesis about how a particular event affects the value of a firm. The hypothesis that the value of the company has changed will be translated in the stock showing an abnormal return. Coupled with the notion that the information is readily impounded in to prices, the concept of abnormal returns is the central key of event study methods. We must be careful in analyzing on how a particular event affects the value of a company because at any time we observe a mixture of market wide factors and a bunch of other firm events. The selection of the benchmark to use or the model to measure normal returns is therefore central to conduct an event study.
1.6 Significance of the Study
Event studies are commonly employed in applied practice, such as in analyzing market efficiency, reliance, and damages in securities litigation. Event studies have been used to look at almost every issue such as stock split, dividend changes, stock issuance, merger and spinoff, hiring or firing of high-level officers and also changes in regulations. This research will provide a clear vision of the effect on the top management changes to the company stock price. Management can evaluate the stock price that shown before and after the announcement was being made, thus, determine whether the changes of top management will be benefited to the company. Furthermore, this research will expose the investors in understanding the event study and help them in making a truthful and proper decision during an investment, especially to the investors who interested in trading the share of Genting Berhad. The stock price is carried information about the performance and effectiveness of the company. It would be the guidance or hint for the investors to decide the best timing to enter the market. Thus, investor would be able to implement an investment strategy that helps them to hold their best interest according to the different stock market they have invested. Securities and Exchange Commission also uses event studies to determine whether there has been insider trading before an announcement.
1.7 Chapter Layout
In the second section, we are described the literature review from the previous researchers. The third contains a brief description of sample data and methodology that suitable for testing the abnormal return from event study. The forth section will be tested the result for the significance of an event effect, the announcement of top management changes over the period. Lastly, the section will provide a conclusion about the main findings, limitations and guidelines for future studies.
1.8 Conclusion
In this research paper, we would like to analyse the effects of announcement on CEO changes to the stock prices of a company. There are event studies done by the previous researchers on different types of announcements for different event windows. However, there is none of the research on announcement for CEO changes to the share price of Genting Berhad in Malaysia.
As a result, we decide to carry out research on event study for the Genting Berhad.
