Stock Prices Increase When New CEOs Discuss Strategy Publicly, According to New Research
The challenges surrounding leadership transitions are well-documented and can be damaging to both the hiring organization and to the incumbent. But according to new research from Oxford University’s Saïd Business School if a new CEO presents their strategy within their first 100 days it can have a positive impact on the stock price of the hiring organization.
The study examined the effects of stock prices following more than 900 public presentations on strategy by new CEOs. When new CEOs presented their strategy in their first 100 days the stock price of the hiring organization increased by an average of 5.3%. The impact was even greater when the new CEO was an external hire (9.3% increase), especially if they came from outside of the hiring organization’s industry (12.4% increase).
“Conventional wisdom has it that strategies are best kept within the organization and that any public presentations are likely to be dismissed as content-free ‘cheap talk’,” said Richard Whittington, Professor of Strategic Management at Saïd Business School, University of Oxford. “However, our research has shown that analysts and investors take them seriously, especially as a means of assessing new CEOs’ experience and competence. New CEO appointments are typically associated with strategic change, which means they set off a lot of investor uncertainty; the greater the uncertainty, the more sensitive the stock price will be to the presentations and to the timing of them.”
The report compares two high-profile approaches to discussing strategy publicly. In May 2015, just one week after his appointment as CEO of Alibaba, Daniel Zhang announced his new ‘Let’s Go Global’ strategy to his staff and the media, leading to an immediate 1% rise in the company’s stock price (worth approximately $2.2 billion) which then increased in the following days.
By contrast, Twitter CEO Jack Dorsey admitted to investors that he didn’t yet have a strategy, wiping $4 billion off his company’s stock valuation in a couple of days. Indeed, the research demonstrates the importance of having a public strategy, but also emphasizes the need to get it right. The average decrease in stock price after a negatively-received strategy presentation is 5%, rising to 13% after nine days.
Dr Basak Yakis-Douglas, Research Fellow at the Oxford University Centre for Corporate Reputation, said: “In our sample, substantially less than half of new CEOs carried out strategy presentations in their first 200 days and less than a quarter did so in their first 100 days. These proportions are even lower for outsiders and inexperienced new CEOs. New CEOs should pay more attention to this means of communicating and, given that the effects are greater within the first 100 days than the next 100, they should remember that, in this case, waiting doesn’t pay.”