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Banking 29 Feb 2016

Wall Street rewards CEOs who most effectively communicate their strategies

It is common knowledge that markets dislike uncertainty. Investor doubts tend to translate into massive sales and sharp drops in capital markets, but presenting a believable message that gives an outlook of growth, or at least stability, can lead to significant gains.

Three Oxford University professors researched the impact of Chief Executive Officers (CEOs) presenting a new strategy on companies’ stock market value. They concluded that most of these statements had a significant impact on stock prices. The effect is even greater for recently appointed CEOs, and even more so if the new CEOs come from outside firms.

CEO strategy presentations affect stock prices

The Oxford professors studied more than 900 strategy presentations given by CEOs of U.S. companies. The presentations mainly focused on their internationalization, innovation and diversification plans. Presentations on earnings or acquisition processes were excluded.

The study concluded that these presentations have generally had a significant impact on stock prices. In fact, the average increase in market value from the presentations is just over 2%. In other words, investors do like to receive the information included in company strategy presentations.

Photo: Stock price reactions to CEO's strategy presentations

What kind of reactions can a strategy presentation cause?

Obviously not all of the presentations led investors or the market to react favorably. Across the whole sample, more strategy presentations gained significant positive stock price reactions (34%), increasing by 4.5%, or approximately $2.4 billion in average market value. Stock prices continued to rise in the days following the presentations, reaching gains over 10%.

A smaller group of presentations (approximately 26%) led to negative market reactions, with stock market prices dropping an average of 4.9% (a loss of $2.6 billion per company). These presentations generally did not include additional information or address investors’ main concerns. For example, Twitter’s CEO Jack Dorsey admitted to investors that he didn’t have a strategy yet, leading the company’s stock value to lose nearly $4 billion in two days.

Finally, the impact of these presentations is even greater when given by newly appointed CEOs, especially for CEOs from outsider companies. A change in company management can clearly create uncertainty among investors. Therefore, the sooner new CEOs ease their concerns, the more likely they are to see a positive reaction in stock prices. The study offers Daniel Zhang as an example. A week after being named new CEO of the Chinese giant Alibaba, he presented his new strategy, “Let’s Go Global” which had an immediate impact. Stock prices rose 1% that day with additional rises in subsequent days.

The study found that presentations given in the first 100 days after appointing a new CEO led to an average increase of 5.3% in stock prices (higher than the 2% average for CEOs overall).

Photo: Stock price reactions to new CEO's Strategy Presentations

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