How CEO Behaviour Like Elon Musk's Influences Stock Price

Photo: Mark Brake/Getty Images

Things haven’t been going great for Elon Musk the past few months.

The Silicon Valley billionaire has seen the spotlight on him and his various companies, including Tesla, grow over the past year, but not in positive ways.

He’s smoked pot on a podcast, made a baseless, public accusation that a rescue worker was a pedophile and announced he was going to take Tesla private on Twitter, leading to a settlement with the U.S. Securities & Exchange Commission in which he gave up his role as chairman of Tesla and agreed to have his comms team review social media statements that could influence the stock price of the company.

He’s back with an interview with 60 Minutes, in which he proclaims to not respect the SEC and blames his stress on the crazy hours he works.

Stock prices for Tesla have followed Musk’s behaviour the past year accordingly. Shares fell seven per cent after his marijuana moment and rose after he announced he was taking Tesla private, only to tumble back down when it became clear that wouldn’t happen.

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So, how does that work?

The CEO is the face of his or her (but let’s be honest, usually his) company, and it’s one of his main duties to avoid spooking investors and, generally, doing and saying absurd things. Musk in particular is associated in the minds of investors with his company — its “success” is in part connected to Musk’s perceived success (whether or not Tesla is actually successful at producing electric cars is another story).

In the past, Tesla’s stock price was positively influenced by Musk’s public statements and tweets. But that’s no longer necessarily the case.

“It’s wise for CEOs to use discretion in what they say in their public statements,” says Erik Sherman, a freelance journalist and columnist at Inc. who has followed Musk’s antics. “Because all of these things when done publicly make people wonder about the stability and character of the CEO, and then the company, because the CEO has a lot of power to change things.”

Some of this can be attributed to fact that the market isn’t rational. Retail and institutional investors are humans, after all, and are moved by emotion. Similarly, those biases appear in the computer algorithms we make that buy and sell stock, because, after all, we made them.

“It’s a combination of emotional responses and trying to make money,” says Sherman. Investors “respond 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 a CEO says something positive — say, about increasing profits or developing a new technology—then likewise shares will increase in value. The opposite behaviour has the opposite result. For example, Musk’s tweet about taking the company private at $US420 per share got the SEC’s attention because it looks like he’s manipulating stock prices. And that has a negative effect - when in reality he was making a joke about weed culture.

“Most CEOs are very careful about what they say in public because they want the stock to do well, because their own compensation is based on it and boards want to see value go up for shareholders,” says Sherman. “Musk is not as circumspect.”

It’s impossible to say what the long-term consequences will be, though there is one guarantee now: The SEC is going to keep a close eye on Musk and Tesla for the foreseeable future. Which doesn’t exactly inspire confidence.


Comments

    Pre-2018 I liked him but frankly hes turned into a total tool that should be kept far away from social media and medicated to actually sleep

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