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WhatmakesyourstockpricegoupanddownKEVINP.COYNEANDJONATHANW.WITTERTheMcKinseyQuarterly,2002Number2CEOsalwayswanttoknowhowthemarketwillreacttonewstrategiesandothermajordecisions.Willacompany’sshareholdersagreewithaparticularmove,orwilltheyfailtounderstandthemotivesbehinditandpunishthestockaccordingly?Andwhatcanmanagementdotoimprovetheoutcome?Tryingtopredictstockpricemovementsisnecessary,ofcourse.Afterall,whenstockpricesfall,thecostofborrowingandofissuingnewequitycanrise,andfallingstockpricescanbothundercuttheconfidenceofemployeesandcustomersandhandicapmergers.Unfortunately,however,mostofthesepredictionsarenomorethanroughguesses,becausethetoolsCEOsusetomakethemarenotveryaccurate.Netpresentvalue(NPV)maybeusefulforestimatingthelong-termintrinsicvalueofshares,butitisfamouslyunreliableforpredictingtheirpriceoverthenextfewquarters.Conversationswithsamplegroupsofinvestorsandanalysts,conductedbythecompanyorbyinvestmentbankers,arenomorereliableforgaugingmarketreactions.Butexecutivescandramaticallyimprovetheaccuracyoftheirpredictions.Byadoptingamoresystematic,rigorousapproach,corporateleaderscanlearntounderstandindividualinvestorsasthoroughlyasmanycompaniesnowunderstandeachoftheirtopcommercialcustomers.Itispossibletoknowsuchcustomerswellbecausethereareonlysomanyofthem.Equally,onlyafinitenumberofinvestorsreallymatterwhenitcomestopredictingstockpricemovements.EveryCEOknowsthatwhenbuyersaremoreanxioustobuythansellersaretosell,sharepricesrise—andthattheyfallwhenthereversehappens.ButfewerCEOsknowthatnoteverybuyerorsellermattersinthisequation.Ourresearchonthechangingstockpricesofmorethan50largeUSandEuropeanlistedcompaniesovertwoyears1makesitclearthatamaximumofonly100currentandpotentialinvestorssignificantlyinfluencethesharepricesofmostlargecompanies.Byidentifyingthesecriticalindividualinvestorsandunderstandingwhatmotivatesthem,executivescanpredicthowtheywillreacttoannouncements—andmoreaccuratelyestimatethedirectionofstockprices.Armedwiththesenewandsolidinsightsabouthowcriticalinvestorsbehaveinspecificsituations,executivescanmakestrategicdecisionsinadifferentlight.Knowingwhatmakescrucialinvestorsbuy,sell,orholdthecompany’sstockallowsCEOstocalculatewhatitssharepricemightbeafteranannouncementandtofactorthiscalculationintotheirstrategicandoperatingdecisions.Toheadoffshort-termselling,acompanycouldmanagethetiming,pace,orsequencingofstrategicannouncements.Itcouldintroduceanewmanagementteambeforeannouncinganacquisition.Itcouldalsotestanimportantnewproductinselectedmarketsbeforethenationwiderollout.Howwillinvestorsreacttoamergerannouncementandwhatwilltheresultingsharepricemeanforadeal?Howmightaspin-offfareinthemarket?Doesthecompanyneedtopreparethemarketortoconsideracarve-outinstead?ACEOevenhasthechoiceofforgingaheadinthefaceofadversepredictions,usingtheinformationtomanagetheexpectationsoftheboard.Anexecutivemay,forinstance,considerboldstrategieseventhoughtheycouldpushsomecriticalinvestorstosellthecompany’sstock.THEFEWTHATMATTERItshouldcomeasnosurprisethatbigtradescansignificantlymovetheneedleonacompany’sstockprice.WhentheBassfamilyofTexas,forexample,solditsstakeinDisney,inSeptember2001,inresponsetoamargincall,Disney’sstockfellby8percent.Buttypically,short-termchangesinacompany’sstockpricearen’ttheresultofasinglebigtrade.Forthe50companieswhosequarterlystockpricevariationswestudied,weconsistentlyfoundthatthemajorityofuniquechangesineachcompany’sstockpriceresultedfromthenetpurchasesandsalesofthestockbyalimitednumberofinvestorswhotradedinlargequantities.(Byuniquechanges,wemeanthoseoccurringrelativetotherestofthemarket.Inotherwords,theydonotincludepricebumpsorfallsthatcoincidedwiththeoverallmovementsofthemarketorthesector.)Althoughthenumberofcrucialinvestorsinacompanyrangedfromasfewas30to(moretypically)asmanyas100,ineachcasethissetofactorshadadramaticimpactonshareprices.Inthecompanieswestudied,wecouldattributefrom60to80percentofalluniquechanges,quarterbyquarter,tothenettradingimbalancesoftheseinvestors.ConsiderasnapshotofthetradinginthesharesofalargeEuropeanindustrialcompany.Exhibit1showstherelationship,overaperiodoftwoyears,betweenthenetbuyingandsellingofits100mostcriticalinvestors,capturedweekly,aswellasthefluctuationinitsstockpricerelativetothemarketindex.2In11ofthe14casesinwhichthecompany’sstockpricemovedsignificantly,thepricewentupordowninconcertwiththenetbuyingorsellingoftheseveryinvestors.Thetwostrongoutliersintheexhibitwerenotrandomevents.Thepointatthebottomrightoccurredwhenthecompanyannouncedtheacquisitionofamajorcompetitor—amovethatlargetradersapplaudedbypurchasingmoreofthecompany’sstockbutthatanalysts,smallinstitutions,andretailshareholdersrejected.Thetopleftoutlieroccurredwhenthegovernmentmadeacrucialregulatoryannouncementwhoseimpactappeared,onthesurface,tobepositive,thusattractingalargenumberofsmallerinvestors,butwasactuallyneutraltonegative,somethingthelargestinvestorsunderstood.3Whyshouldthesizeoftheimbalancebetweenasksandbidsmatter?Atanyinstant,themarketconsistsofaseriesofgraduatedofferstobuy(inotherwords,Ahasanoutstandin