Item #7 of our Rethink the Way You Invest says not to confuse entertainment with advice. It’s a reminder that media emphasis is often on short-term, emotionally-charged and sensational events.
Cameron Passmore, my colleague at PWL Ottawa, came across a study entitled “CEO Interviews on CNBC”1, released on January 21, 2011, which examines how the stock price of a company is impacted by the appearance of a CEO on CNBC.
CNBC has become one of the leading sources of business news, with average viewership during trading days of 752,000. Many CEOs are likely happy to have an opportunity to be in front of such an audience. However, what can, or does, a CEO say in an interview and does it influence the purchase or sale of the company’s stock?
The study in question looked at 6,937 CEO interviews from 1997 to 2006 to see whether or not the media attention affected stock prices. The findings are interesting – there were abnormally high trading volumes on the 2 days PRIOR to the interview (tying in with the timing of the announcement of the appearance of a CEO), with an average increase in the stock price of 1.6%. However, over the 10 days AFTER the interview there was a negative return of just over 1%.
Often, the CEO has no new news to convey – the interview contains a repackaging of information already published and which has already been taken into account in the market’s determination of stock prices. Perhaps the appearance of the CEO for an interview IS the news?
The study also looked at the relationship of small to large sized trades. The findings showed significantly more small sized trades on the day of the interview (assuming no other corporate news or announcements). Small sized trades imply trading of individual investors, thus the individual investor is the driving force behind the price run-ups rather than institutional investors.
Interestingly, one area where there is evidence of a permanent increase in the pricing is for companies that have not previously had media attention. Here, the rationale is that the more exposure, the more awareness of analysts and investors, which can lead to positive market response.
Many other factors were identified as having some degree of influence on stock pricing – whether or not the CEO laughed during the interview; who conducted the interview; whether the tone of the CEO or interviewer was negative; the length of a response. After controlling for these and a variety of other variables, the authors conclude that it was the media attention that caused the spike and reversal in the stock price.
So what does this study really tell us? There is a great deal of information being analyzed by a large number of people, all of whom have access to the information at the same time. It is difficult for any investor – institutional or individual – to have an information edge.
Bottom line – keep the discipline – stick to your strategy and don’t make trading decisions based on CNBC interviews. If you have difficulty doing this on your own, consider the services of a professional advisor.
1 Meschke, Felix and Kim, Y. Han (Andy), CEO Interviews on CNBC (Jan 21, 2011). Available at SSRN: http://ssrn.com/abstract=1627683