How the Behavior of CEO Elon Musk Affects the Stock Price
In the past few months, things have not been going well for Elon Musk.
The Silicon Valley billionaire has been in the spotlight and his various companies, including Tesla, have grown over the past year, but not for the better. He smoked pot on a podcast, made an unfounded public accusation of pedophile to the lifeguard, and announced he was going to shut down Tesla on Twitter , leading to an agreement with the US Securities and Exchange Commission in which he renounced his role. as chairman of Tesla and agreed to have his public relations team review social media statements that could affect the company’s stock price.
He returned from an interview for 60 Minutes , in which he states that he does not respect the SEC and blames his stress on the crazy hours he works.
Accordingly, Tesla’s share prices have followed Musk’s behavior last year. The stock fell seven percent after he took marijuana and rallied after he announced he would take Tesla into private ownership, but then plunged again when it became clear that it wasn’t going to happen.
So how does it work?
The CEO is the face of his (but frankly, usually his) company, and one of his main responsibilities is not to scare investors and usually not to do or say absurd things. Specifically, Musk is associated in the minds of investors with his company – its “success” is partly related to Musk’s supposed success (whether Tesla really succeeds in making electric vehicles is a different story).
“Most CEOs are very wary of what they say publicly because they want the stock to do well, because their own compensation is based on that, and the boards want the shareholder value to go up,” says Eric Sherman is a freelance journalist and columnist. to Inc., which has followed Musk’s antics . “Musk is not that careful.”
Tesla’s stock price has been positively influenced by Musk’s public statements and tweets in the past. But this is no longer the case.
“It’s prudent for CEOs to use discretion in what they say in their public statements,” Sherman says. “Because all these things, when done publicly, make people think about the stability and character of the CEO and then the company, because the CEO has a lot of authority to change something.”
This can partly be explained by the irrationality of the market. After all, retail and institutional investors are human and driven by emotion. Likewise, these biases show up in the computer algorithms we use to buy and sell stocks because, after all, we created them ourselves.
“It’s a combination of emotional reactions and trying to make money,” says Sherman. Investors “are reacting to conditions and want to make more money, and they want to know what’s going on, and if they think it’s going to fall apart, they want to get out.”
When the CEO says something positive – say, about increasing profits or developing a new technology – then the stock will go up as well. The opposite behavior gives the opposite result. For example, Musk’s tweet about the privatization of the company at $ 420 a share caught the attention of the Securities and Exchange Commission because it looks like he is manipulating stock prices. And this has a negative effect.
“In fact, the behavior of any leader affects the perceived stability and investment attractiveness of that firm,” writes Virginie O’Shea, director of research at the Aite Group , a market research firm. “Codes of conduct exist in most public companies that prohibit risky or inappropriate behavior, including market manipulation (such as the recent tweet incident) and issues such as # MeToo by executives.”
It’s impossible to say what the long-term implications will be, although there is now one guarantee: The SEC will be keeping a close eye on Musk and Tesla for the foreseeable future. Which definitely doesn’t inspire confidence . “If this activity means that shareholders are likely to demand the CEO’s resignation, that will make a big difference in the short term,” says O’Shea. “Stock prices often recover from corrective action, but it all depends on confidence and trust, which are not easy to judge.”
Update 11:45 AM: Added Virginie O’Shea’s comment to this article.