What makes your stock price go up and down KEVIN P. COYNE AND JONATHAN W. WITTER
The McKiny Quarterly, 2002 Number 2
C EOs always want to know how the market
will react to new strategies and other major
decisions. Will a company’s shareholders
agree with a particular move, or will they fail
to understand the motives behind it and
punish the stock accordingly? And what can
management do to improve the outcome?
Trying to predict stock price movements is necessary, of cour. After all, when stock
prices fall, the cost of borrowing and of issuing new equity can ri, and falling stock prices
can both undercut the confidence of employees and customers and handicap mergers. Unfortunately, however, most of the predictions are no more than rough guess,
难忘的旅程becau the tools CEOs u to make them are not very accurate. Net prent value (NPV) may be uful for estimating the long-term intrinsic value of shares, but it is famously unreliable for predicting their price over the next few quarters. Conversations with sample groups of investors and analysts, conducted by the company or by investment bankers, are
no more reliable for gauging market reactions.
But executives can dramatically improve the accuracy of their predictions. By adopting a
more systematic, rigorous approach, corporate leaders can learn to understand individual investors as thoroughly as many companies now understand each of their top commercial customers. It is possible to know such customers well becau there are only so many of them. Equally, only a finite number of investors really matter when it comes to predicting
stock price movements.
Every CEO knows that when buyers are more anxious to buy than llers are to ll, share prices ris
e—and that they fall when the rever happens. But fewer CEOs know that not
every buyer or ller matters in this equation. Our rearch on the changing stock prices of more than 50 large US and European listed companies over two years1 makes it clear that
a maximum of only 100 current and potential investors significantly influence the share
prices of most large companies. By identifying the critical individual investors and understanding what motivates them, executives can predict how they will react to announcements—and more accurately estimate the direction of stock prices.
Armed with the new and solid insights about how critical investors behave in specific situations, executives can make strategic decisions in a different light. Knowing what
makes crucial investors buy, ll, or hold the company’s stock allows CEOs to calculate
what its share price might be after an announcement and to factor this calculation into their strategic and operating decisions. To head off short-term lling, a company could manage
the timing, pace, or quencing of strategic announcements. It could introduce a new management t
eam before announcing an acquisition. It could also test an important new product in lected markets before the nationwide rollout. How will investors react to a
merger announcement and what will the resulting share price mean for a deal? How might
a spin-off fare in the market? Does the company need to prepare the market or to consider
a carve-out instead?
A CEO even has the choice of forging ahead in the face of adver predictions, using the information to manage the expectations of the board. An executive may, for instance,
consider bold strategies even though they could push some critical investors to ll the company’s stock.
THE FEW THAT MATTER
It should come as no surpri that big trades can significantly move the needle on a company’s stock price. When the Bass family of Texas, for example, sold its stake in
Disney, in September 2001, in respon to a margin call, Disney’s stock fell by 8 percent.
But typically, short-term changes in a company’s stock price aren’t the result of a single big trade. For the 50 companies who quarterly stock price variations we studied, we consistently found that the majority of unique changes in each company’s stock price resulted from the net purchas and sales of the stock by a limited number of investors who traded in large quantities. (By "unique changes," we mean tho occurring relative to the rest of the market. In other words, they do not include price bumps or falls that coincided with the overall movements of the market or the ctor.)
Although the number of crucial investors in a company ranged from as few as 30 to (more typically) as many as 100, in each ca this t of actors had a dramatic impact on share prices. In the companies we studied, we could attribute from 60 to 80 percent of all unique changes, quarter by quarter, to the net trading imbalances of the investors.
Consider a snapshot of the trading in the shares of a large European industrial company. Exhibit 1 shows the relationship, over a period of two years, between the net buying and lling of its 100 most critical investors, captured weekly, as well as the fluctuation in its stock price relative to the market index.2In 11 of the 14 cas in which the company’s stock price moved significantly, the price went up or down in concert with the net buying or lling of the very investors.
The two strong outliers in the exhibit were not random events. The point at the bottom right occurred when the company announced the acquisition of a major competitor—a move that large traders applauded by purchasing more of the company’s stock but that analysts, small institutions, and retail shareholders rejected. The top left outlier occurred when the government made a crucial regulatory announcement who impact appeared, on the surface, to be positive, thus attracting a large numbe
r of smaller investors, but was actually neutral to negative, something the largest investors understood.3菜干焖五花肉
Why should the size of the imbalance between asks and bids matter? At any instant, the market consists of a ries of graduated offers to buy (in other words, A has an outstanding offer to buy 1,000 shares at $60, and B offers to buy 2,000 shares at $59.875) as well as a similar t of offers to ll (C offers to ll 1,500 shares at $60.50, and D offers to ll 1,000 shares at $60.75). A sale is made only when one side surrenders across this bid-ask spread (that is, A agrees to buy 1,000 of C’s shares at $60.50). When buy ers collectively want large amounts of a stock, they have to keep surrendering to successive layers of llers up the offer curve. Sellers who unload large numbers of shares move
along the curve in the opposite direction.
潭面无风镜未磨
Of cour, the correlation between the buying or lling of large investors, on the one hand, and the price of a stock, on the other, can never be perfect. Smaller investors sometimes act in sync and overpower larger holders—as happened twice in two years with the shares of the European industrial company. News, rumors, and world events can spark broad market swings. But among the companies we have studied, the correlation is remarkably persistent (Exhibit 2).
INDUSTRIAL MARKETING FOR INVESTORS
Few companies today get to know their top investors well enough to predict with any accuracy what will make tho investors buy or ll more of their shares. The CFO of a large financial company, which was about to announce the divestiture of a major division, believed that he was "right on top of
奶奶性
[our] investor ba." Indeed, in a general way, the company’s executives knew the big investors well—what they thought of management, the c reditworthiness of the company, and so on. But executives didn’t know what investors thought about specific potential strategies, such as a divestiture. Was the offer price that executives were considering above or below the value investors attributed to the unit when tho investors calculated the company’s total value? Or did investors think that the company benefited from cross-divisional synergies that would end with the divestiture?
To develop the ability to make predictions about shareholders, companies should identify their stock price movers and calculate how many additional shares would be offered or sought in reaction to specific announcements. Through background analysis and interviews, the companies must then analyze in depth the trading behavior of the movers, developing trading profiles for each of them. Finally, companies should u the information in the profiles to predict which movers would be likely to react to specific corporate announcements by lling or buying in the short term and then calculate what this would mean for share prices.4
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Getting to know investors isn’t a one-shot process. Companies must continually reexamine who is moving their shares—investors come and go. An ongoing dialogue with the movers
deepens the knowledge of the companies
拉雪橇and, over time, sharpens their ability to
predict the actions of their critical investors.
However, most companies will need to beef
up their investor relations capabilities to get
the job done. The good news: getting started
isn’t a mammoth task. Two to three months
should be enough to develop an initial t of profiles of the most important investors.
IDENTIFY THE CRITICAL INVESTORS
A company should begin its asssment by asking who has the potential to move its stock price. Some of the movers could be among the company’s largest current shareholders. Some may be smaller holders who want to increa their ownership. And some are potential large players who do not yet own any of the company’s stock but could purcha or short it in large quantities. What do th
e movers have in common? They are active stock-portfolio managers who regularly buy and ll large quantities of shares in the company or in similar companies—typically, managers of mutual, pension, or hedge funds or even individual large investors.
In other words, investors who count have both weight and a propensity to throw it around. Although the actual calculations needed to put together the list of movers are complicated—requiring more discussion than we can prent in this article—a likely mover is someone who does or could reasonably account for at least 1 percent of a stock’s trading volume for one quarter.
Movers are not necessarily a company’s largest investors. Shareholders (such as family holdings or t rusts) that have owned big blocks of the company’s stock for a long time don’t move it quarter to quarter. Neither do index funds unless the company is added to or dropped from an important index (or unless the fund’s asts change dramatically). Among the largest 20 investors of one big pharmaceuticals company we studied, only 10 were movers, and this proved to be typical of the companies we studied. What is more, nearly half of the large movers of the stock of the pharmaceuticals company over eight quarters from 1999 to 2001 weren’t listed among its 20 largest investors during any single quarter. Moreover, companies should add potential investors to the list of movers. For a large chemical business in our study, we analyzed the way the positions of investors i
n other chemical business changed over time. One investor, a $22 billion investment fund, had been an active trader in other, similar chemical companies and liked to buy asts at the bottom of a cycle. At the time, the ctor was depresd, so for this and other reasons we added the investor to the company’s list of movers. A few months later, the investor purchad more than five million of the company’s shares.
Potential movers include tho who have made money investing in other industries in similar circumstances. Investors who bet on the right players in an industry that consolidated, for example, may now be eyeing investments in other ctors on the verge of consolidation. Potential movers may also be investors who purchad shares in a
comp any’s upstream or downstream suppliers and have a history of investing more broadly in the value chain. Some may have a taste for betting on companies that u certain capital models (high cash flow, say, or high leverage), have new CEOs, or face particular market changes or competitive conditions.
To determine how many investors should go on the list—40? 70? 100?—a company should test the accuracy of its predictions over previous quarters to arrive at the number that works best. Too few wil
l yield poor correlations between activity and stock prices; too many will add to the cost and complexity of the process. In addition, the list changes frequently. Our experience suggests that a mover typically stays on such lists for six quarters—long enough to give the company time to become familiar with it but short enough so that there will always be new movers to study.
玫瑰花种植MOVING THE MOVERS
Once a company has identified its movers, the next step is to develop thorough profiles of
all of them. Companies begin by conducting an "outside-in" analysis of each one, including its stated investment criteria and objectives and its trading patterns. Discussions with every investor give a company a chance to fill in the gaps in its understanding of its movers and to confirm its hypothes about what they trade and why.
The resulting profile should first describe how an investor makes decisions. What does the investor want to invest in, using what valuation methodologies? How is it likely to react to events or to data, which after all can be interpreted in many ways? Are its investments subject to any constraints, such as their size and frequency? Second, the profile should describe each investor’s views on issues that the company might face—such as any new strategies (for instance, whether the company shoul
d go into China), earnings surpris, and changes in management.
To get this kind of information, companies must phra the questions carefully in view of a US Securities and Exchange Commission (SEC) regulation that prohibits companies from disclosing material information to some but not all investors.5 Typically, indirect questions work best. A company might ask investors why they purchad or sold their holdings in a particular business, for instance. But the company would actually be trying to understand why they sold their holdings after the business announced, for example, that it was investing in China. Do the investors dislike the risks that are associated with China, distrust the management team put in place to manage expansion in Asia, or reject specific details of the disclod plan?指物
The preci format of the profiles will vary from company to company, depending upon the decisions and events it expects to face. However, the content of each profile should focus on predicting how each investor will react to specific corporate events (Exhibit 3). Companies will want to collect the information in a databa where it can be updated regularly.
