Why a CFO’s exit should make investors take note
To be sure, not every CFO exit is an indicator of a company’s operational weakness.
To be sure, not every CFO exit is an indicator of a company’s operational weakness. In several cases, it can be a routine instance of the CFO quitting for better prospects, but a change in the CFO of a company that is already underperforming should not be ignored by investors. In such cases, weakness in the stock would have already crept in and could be accentuated following the change in CFO.
An analysis of CFO changes in listed companies since 2017 (post demonetisation) reveals that a CFO exit can be an indicator of an impending weakness in the stock, especially in smaller companies. There can be a variety of reasons for the exit of the CFO – governance issues, working capital crisis, headwinds faced by the industry or an acquisition gone wrong. The exit, if acrimonious, reflects the flashpoint in the senior management. For an outside investor, it is difficult to know the real reasons for the exit. Hence, the announcement of an exit or change calls for running a check on the company’s fundamentals.
The stock of Bombay Burmah Trading Corporation, for instance, has fallen 44 per cent since its CFO resigned in April last year. Similarly, Kaya, the wellness arm of Marico Limited, has seen a 44 per cent decline in its share price since its CFO resigned in June 2018.
Often, the change in CFO is less of a concern in case of large established companies. For instance, the CFO of Pidilite Industries stepped down in March this year. However, the stock price has remained firm since, even as the company has yet to appoint a new CFO. Besides, in case of large companies, investors recognise CFO exits as an important development and react immediately on the bourses. Infosys stock dropped over 4 per cent intraday following the resignation of its CFO last August, but it has traded firm since then. The stock price of Vedanta fell over 4 per cent intraday in April following the resignation of Cairn India’s CEO and CFO.
It is the exit of CFOs in smaller companies that largely go unnoticed but act as a pointer for the likely direction of the stock price. CFO exits in case of newly listed companies have typically proven to be quite a pointer. Healthcare Global Enterprises announced the exit of its CFO in July last year. Its stock is down 55 per cent since. The CFO of SH Kelkar & Company quit in October 2018, and its stock has fallen 35 per cent since. The stock of Dr Agarwal’s Eye Hospital has declined 52 per cent since its CFO resigned in March last year.
Ujjivan financial services announced the exit of its CFO at the end of May, and its stock has fallen 15 per cent since. Eris Lifesciences announced the exit of its whole-time director, its key managerial person, in March, and its stock is down 29 per cent since then. Arvind Fashions, the carved-out retail arm of Lalbhai group, announced the exit of its CFO a month after its listing in March this year. Its stock price is down 36 per cent since then. The CFO of Matrimony.com resigned in November 2018. Its stock, which had been underperforming till then, fell 4 per cent on the announcement but has since gained 22 per cent. The stock of MT Educare suffered a decline of 20 per cent in the year following the exit of its CFO in September 2017.
Some large companies have also displayed this pattern. Yes Bank saw a new CFO taking charge in April last year, and its stock has depreciated 70 per cent since. Lupin’s CFO quit in November 2018. Its stock has depreciated 12 per cent since the CFO’s exit. Incidentally, the drug firm has not yet appointed a new CFO.
While there is no direct connection between a CFO’s exit and the drop in company’s stock price, an abrupt exit is often a manifestation of the issues affecting the company’s business. There are many cases of CFO exits having no negative bearing on the performance of the companies concerned. For instance, the CFO of Zydus Wellness resigned in December 2017, but the company’s stock rose 47 per cent over the next year.