Study shows new CEOs who 'talk the talk' drive up stock prices

January 7, 2016
Steve Ballmer, Chief Executive at Microsoft, on a visit to Saïd Business School in 2014. Credit: David Fisher Photography

New chief executives, especially those appointed from outside an organisation, can see the company's stock price soar if they present their strategy to investors in their first 100 days, new research from Oxford has discovered. But the effects are lessened if the CEO was an internal appointment or if the presentation is delayed too long.

The study of the effects on stock prices of more than 900 public presentations on strategy by the CEOs of leading American companies revealed that new CEOs who present their strategy within the first 100 days of their appointment can see stock prices rise by an average of 5.3% on presentation day (around $2.8 billion in market value). The average stock price gains for presentations by new CEOs appointed from outside the organisation were 9.3% (just under $5 billion), and for new CEOs from outside the company's home industry they were 12.4% (around $6.6 billion).

'Conventional wisdom has it that strategies are best kept within the organisation 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.'

In articles published in Strategic Management Journal and Harvard Business Review, Professor Whittington and his co-authors, Dr Basak Yakis-Douglas, Research Fellow at the Oxford Centre for Corporate Reputation at the Saïd Business School, and Dr Kwangwon Ahn, Assistant Professor at Peking University HSBC Business School, analysed stock price responses to strategy presentations given by companies on the NYSE or NASDAQ exchange in the period from 1 January 2000 to 30 December 2010. These were general, forward-looking presentations talking about strategies such as internationalisation, innovation and diversification; the researchers excluded both announcements of actual events (such as an acquisition) and presentations given the same day as earnings announcements or forecasts.

In May 2015, just one week after his appointment as Chief Executive of Chinese ecommerce giant Alibaba, Daniel Zhang announced his proposed new 'Let's Go Global' strategy to his staff and the media. The strategy to expand its business internationally led to an immediate 1% rise in the company's (the equivalent of $2.2 billion), with further rises in the following days. On the other hand, when Twitter CEO Jack Dorsey admitted to that he didn't yet have a strategy, he wiped $4 billion off his 's stock value in a couple of days.

Dr Yakis-Douglas commented: 'Given the generally positive response to strategy presentations, it is surprising that they are so little used. 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.' Dr Yakis-Douglas further suggested: '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.'

Explore further: CEO compensation study examines factors in excess returns

More information: Richard Whittington et al. Cheap talk? Strategy presentations as a form of chief executive officer impression management, Strategic Management Journal (2015). DOI: 10.1002/smj.2482

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