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Shares prices signal the impact of news

Updated: Jul 3, 2023

A not-so-long read

A sharp fall in Xero’s share price following its CEO change announcement demonstrated how news is influenced by existing perceptions. The day the new CEO Sukhinger Singh was announced, Xero’s share price fell 11%, from $72 to $64.

You may think shares could fall because change means uncertainty. But research consistently shows CEO changes do not influence share prices negatively. If anything, it’s helpful, as subsequent financial performance seems to be interpreted more positively when it comes from new CEOs.

It’s more likely that the reaction was due to something else going on. And yes, there is: Xero’s share price has drifted down since missing revenue and customer targets earlier in the year.

In that context, the dreary tentativeness of the CEO news triggered, or failed to assuage, existing thoughts about company performance.

Research has shown that foreshadowing big news like a CEO change with at least two pieces of positive news, can reduce the share price impact by about 15%.

So you might have expected Xero to have tried stacking positive news against the performance doubts, and against the CEO change.

It did. Its website lists five pieces of ‘news’ in the month prior to the CEO change; a story about a UK Xero accountant caring for clients wellbeing, news that Xero was on the Financial Review’s list of innovative companies, and on a list of UK’s best tech workplaces for women, that it was awarded Canstar’s Most Satisfied Customer Award for small business accounting software, and launched a ‘partnership’ with English football to “champion women in football”.

The two main shortcomings of this material is that they are not about the US market, where the new CEO will be based, and they are largely ESG-related (environmental, social, governance issues).

Despite the hype for doing good, customers don’t shop on that basis, and neither do share markets. Research shows that ESG news has to be financial material – related directly to the company’s sector – before it improves share price. It wasn’t helpful then, that one of the pieces of news following the CEO announcement was about Xero’s commitment to net zero emissions.

Many companies appear unstructured in choice of news content and flow, but there is a wealth of analysis that suggest techniques that would improve the response of investors.

For example, people respond better when receiving two pieces of information in a negative-positive order. More recent news is given greater weight by recipients, than the older. This effect is optimised when there are four or more pieces of information delivered in sequence.

When delivering a lot of information, the organisation of it influences the emotional response. For example, to get the best uplift if you have a big piece of positive information and a small negative piece, you should present them together. If you have a small piece of positive information and a big negative piece, you should deliver them separately, with the good news last – to gain from the recency effect.

Companies have power to influence the reception of their news. It requires astute market-focused selection of content, and timing, ordering and combining of information.

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