Whatt maakess yoour stoock priice go up andd doownKEVIIN PP. CCOYNNE AAND JONNATHHAN W. WITTTERR The McKKinssey Quaarteerlyy, 220022 Nuumbeer 22 CEOss allwayys wwantt too knnow howw thhe mmarkket willl rreacct tto nnew strrateegiees aand othher majjor deccisiionss. WWilll a commpanny’ss shhareehollderrs aagreee wwithh a parrticculaar mmovee, oor wwilll thhey faiil tto uundeersttandd thhe mmotiivess beehinnd iit aand punnishh thhe sstocck aaccoordiinglly? Andd whhat cann maanaggemeent do to impprovve tthe outtcomme?Tryiing to preedicct sstocck ppricce mmoveemennts is neccesssaryy, oof ccourrse.. Affterr alll, wheen sstocck ppricces falll, thee coost of borrrowwingg annd oof iissuuingg neew eequiity cann riise,, annd ffalllingg sttockk prricees ccan botth uundeercuut tthe connfiddencce oof eemplloyeees andd cuustoomerrs aand hanndiccap merrgerrs. Unfforttunaatelly, howweveer, mosst oof tthesse ppreddicttionns aare no morre tthann rooughh guuessses,, beecauuse thee tooolss CEEOs usee too maake theem aare nott veery acccuraate.. Neet ppressentt vaaluee (NNPV)) maay bbe uusefful forr esstimmatiing thee loong--terrm iintrrinssic vallue of shaaress, bbut it is fammoussly unrreliiablle ffor preedicctinng ttheiir ppricce ooverr thhe nnextt feew uarrterrs. Connverrsattionns wwithh saamplle ggrouups of invvesttorss annd aanallystts, connducctedd byy thhe ccomppanyy orr byy innvesstmeent bannkerrs, aree noo moore relliabble forr gaaugiing marrkett reeacttionns.But exeecuttivees ccan draamatticaallyy immproove thee acccurracyy off thheirr prrediictiionss. BBy aadopptinng aa moore sysstemmatiic, riggoroous appproaach,, coorpooratte lleadderss caan llearrn tto uundeersttandd inndivviduual invvesttorss ass thhorooughhly as manny ccomppaniies noww unnderrstaand eacch oof ttheiir ttop commmerrciaal ccusttomeers.. Itt iss poossiiblee too knnow succh ccusttomeers welll bbecaausee thheree arre oonlyy soo maany of theem. Equuallly, onlly aa fiinitte nnumbber of invvesttorss reeallly mmattter wheen iit ccomees tto ppreddicttingg sttockk prricee moovemmentts.Everry CCEO knoows thaat wwhenn buuyerrs aare morre aanxiiouss too buuy tthann seelleers aree too seell,, shharee prricees rrisee—annd tthatt thhey falll wwhenn thhe rreveersee haappeens.. Buut ffeweer CCEOss knnow thaat nnot eveery buyyer or selllerr maatteers in thiis eequaatioon. Ourr reeseaarchh onn thhe cchannginng sstocck ppricces of morre tthann 500 laargee USS annd EEuroopeaan llistted commpanniess ovver twoo yeearss1 maakess itt cllearr thhat a mmaxiimumm off onnly 1000 cuurreent andd pootenntiaal iinveestoors siggnifficaantlly iinflluennce thee shharee prricees oof mmostt laargee coompaaniees. By ideentiifyiing theese criiticcal inddiviiduaal iinveestoors andd unnderrstaandiing whaat mmotiivattes theem, exeecuttivees ccan preedicct hhow theey wwilll reeactt too annnouunceemennts——andd moore acccuraatelly eestiimatte tthe dirrecttionn off sttockk prricees.Armeed wwithh thhesee neew aand sollid inssighhts aboout howw crritiicall innvesstorrs bbehaave in speeciffic sittuattionns, exeecuttivees ccan makke sstraateggic deccisiionss inn a diffferrentt liightt. KKnowwingg whhat makkes cruuciaal iinveestoors buyy, sselll, oor hholdd thhe ccomppanyy’s stoock alllowss CEEOs to callcullatee whhat itss shharee prricee miightt bee affterr ann annnouunceemennt aand to facctorr thhis callcullatiion intto ttheiir sstraateggic andd opperaatinng ddeciisioons.. Too heead offf shhortt-teerm selllinng, a ccomppanyy coouldd maanagge tthe timmingg, ppacee, oor ssequuenccingg off sttrattegiic aannoounccemeentss. IIt ccoulld iintrroduuce a nnew mannageemennt tteamm beeforre aannoounccingg ann accquiisittionn. IIt ccoulld aalsoo teest an impporttantt neew pprodductt inn seelecctedd maarkeets befforee thhe nnatiionwwidee roolloout.. Hoow wwilll innvesstorrs rreacct tto aa meergeer aannoounccemeent andd whhat willl tthe ressulttingg shharee prricee meean forr a deaal? Howw miightt a spiin-ooff farre iin tthe marrkett? DDoess thhe ccomppanyy neeed to preeparre tthe marrkett orr too coonsiiderr a carrve--outt innsteead??A CEEO eevenn haas tthe chooicee off foorgiing aheead in thee faace of advversse ppreddicttionns, usiing thee innforrmattionn too maanagge tthe exppecttatiionss off thhe bboarrd. An exeecuttivee maay, forr innstaancee, cconssideer bboldd sttrattegiies eveen tthouugh theey ccoulld ppushh soome criiticcal invvesttorss too seell thee coompaany’’s sstocck.THE FEWW THHAT MATTTERRIt sshouuld comme aas nno ssurpprisse tthatt biig ttraddes cann siigniificcanttly movve tthe neeedlee onn a commpanny’ss sttockk prricee. WWhenn thhe BBasss faamilly oof TTexaas, forr exxampple,, soold itss sttakee inn Diisneey, in Sepptemmberr 20001,, inn reespoonsee too a marrginn caall,, Diisneey’ss sttockk feell by 8 pperccentt.But typpicaallyy, sshorrt-ttermm chhangges in a ccomppanyy’s stoock priice areen’tt thhe rresuult of a ssinggle bigg trradee. FFor thee 500 coompaaniees wwhosse uarrterrly stoock priice varriattionns wwe sstuddiedd, wwe cconssisttenttly fouund thaat tthe majjoriity of uniiquee chhangges in eacch ccomppanyy’s stoock priice ressultted froom tthe nett puurchhasees aand salles of thee sttockk byy a limmiteed nnumbber of invvesttorss whho ttradded in larrge quaantiitiees. (Byy "uuniue chaangees,"" wee meean thoose occcurrringg reelattivee too thhe rrestt off thhe mmarkket.. Inn ottherr woordss, ttheyy doo noot iinclludee prricee buumpss orr faallss thhat coiinciidedd wiith thee ovveraall movvemeentss off thhe mmarkket or thee seectoor.))Althhouggh tthe nummberr off crruciial invvesttorss inn a commpanny rrangged froom aas ffew as 30 to (moore typpicaallyy) aas mmanyy ass 1000, in eacch ccasee thhis sett off acctorrs hhad a ddrammatiic iimpaact on shaare priicess. IIn tthe commpanniess wee sttudiied,, wee coouldd atttriibutte ffromm 600 too 800 peerceent of alll unniquue cchanngess, uarrterr byy quuartter,, too thhe nnet traadinng iimbaalanncess off thhesee innvesstorrs.Conssideer aa snnapsshott off thhe ttraddingg inn thhe ssharres of a llargge EEuroopeaan iinduustrriall coompaany.. Exxhibbit 1 sshowws tthe rellatiionsshipp, ooverr a perriodd off twwo yyearrs, bettweeen tthe nett buuyinng aand selllinng oof iits 1000 moost criiticcal invvesttorss, ccapttureed wweekkly,, ass weell as thee fllucttuattionn inn itts sstocck ppricce rrelaativve tto tthe marrkett inndexx.2 Inn 111 off thhe 114 ccasees iin wwhicch tthe commpanny’ss sttockk prricee moovedd siigniificcanttly,, thhe ppricce wwentt upp orr doown in conncerrt wwithh thhe nnet buyyingg orr seelliing of theese verry iinveestoors..The twoo sttronng ooutllierrs iin tthe exhhibiit wweree noot rranddom eveentss. TThe poiint at thee boottoom rrighht ooccuurreed wwhenn thhe ccomppanyy annnouunceed tthe acuissitiion of a mmajoor ccomppetiitorr—a movve tthatt laargee trradeers appplauudedd byy puurchhasiing morre oof tthe commpanny’ss sttockk buut tthatt annalyystss, ssmalll iinsttituutioons,, annd rretaail shaarehholdderss reejecctedd. TThe topp leeft outtlieer ooccuurreed wwhenn thhe ggoveernmmentt maade a ccrucciall reegullatoory annnounncemmentt whhosee immpacct aappeeareed, on thee suurfaace,, too bee poosittivee, tthuss atttraactiing a llargge nnumbber of smaalleer iinveestoors,, buut wwas acttuallly neuutraal tto nnegaativve, sommethhingg thhe llarggestt innvesstorrs uundeersttoodd.3Why shoouldd thhe ssizee off thhe iimbaalannce bettweeen aaskss annd bbidss maatteer? At anyy innstaant,, thhe mmarkket connsissts of a sseriies of graaduaatedd offferrs tto bbuy (inn ottherr woordss, AA haas aan ooutsstanndinng ooffeer tto bbuy 1,0000 shaaress att $660, andd B offferss too buuy 22,0000 ssharres at $599.8775) as welll aas aa siimillar sett off offferrs tto sselll (CC offferrs tto sselll 1,,5000 shharees aat $$60..50,, annd DD offferrs tto sselll 1,,0000 shharees aat $$60..75)). AA saale is madde oonlyy whhen onee siide surrrennderrs aacrooss thiis bbid--askk sppreaad ((thaat iis, A aagreees to buyy 1,,0000 off C’’s ssharres at $600.500). Wheen bbuyeers colllecctivvelyy waant larrge amoountts oof aa sttockk, ttheyy haave to keeep ssurrrendderiing to succcesssivve llayeers of selllerrs uup tthe offfer currve.. Seelleers whoo unnloaad llargge nnumbberss off shharees mmovee allongg thhe ccurvve iin tthe oppposiite dirrecttionn.Of ccourrse,, thhe ccorrrelaatioon bbetwweenn thhe bbuyiing or selllinng oof llargge iinveestoors,, onn thhe oone hannd, andd thhe ppricce oof aa sttockk, oon tthe othher,, caan nneveer bbe pperffectt. SSmalllerr innvesstorrs ssomeetimmes actt inn syync andd ovverppoweer llargger hollderrs—aas hhapppeneed ttwicce iin ttwo yeaars witth tthe shaaress off thhe EEuroopeaan iinduustrriall coompaany.. Neews,, ruumorrs, andd woorldd evventts ccan spaark brooad marrkett swwinggs. Butt ammongg thhe ccomppaniies we havve sstuddiedd, tthe corrrellatiion is remmarkkablly pperssisttentt (EExhiibitt 2)).INDUUSTRRIALL MAARKEETINNG FFOR INVVESTTORSSFew commpanniess toodayy geet tto kknoww thheirr toop iinveestoors welll eenouugh to preedicct wwithh anny aaccuuraccy wwhatt wiill makke tthosse iinveestoors buyy orr seell morre oof ttheiir ssharres.. Thhe CCFO of a llargge ffinaanciial commpanny, whiich wass abboutt too annnouuncee thhe ddiveestiiturre oof aa maajorr diivissionn, bbeliieveed tthatt hee waas ""rigght on topp off [oour]] innvesstorr baase.." IIndeeed,, inn a genneraal wway,, thhe ccomppanyy’s exeecuttivees kkneww thhe bbig invvesttorss weell——whaat ttheyy thhougght of mannageemennt, thee crrediitwoorthhineess of thee coompaany,, annd sso oon. Butt exxecuutivves diddn’tt knnow whaat iinveestoors thooughht aabouut sspeccifiic ppoteentiial strrateegiees, succh aas aa diivesstitturee. WWas thee offferr prricee thhat exeecuttivees wweree coonsiiderringg abbovee orr beeloww thhe vvaluue iinveestoors atttribbuteed tto tthe uniit wwhenn thhosee innvesstorrs ccalcculaatedd thhe ccomppanyy’s tottal vallue?? Orr diid iinveestoors thiink thaat tthe commpanny bbeneefitted froom ccrosss-ddiviisioonall syynerrgiees tthatt woouldd ennd wwithh thhe ddiveestiiturre?To ddeveelopp thhe aabillityy too maake preedicctioons aboout shaarehholdderss, ccomppaniies shoouldd iddenttifyy thheirr sttockk prricee mooverrs aand callcullatee hoow mmanyy adddittionnal shaaress woouldd bee offferred or souughtt inn reeacttionn too sppeciificc annnouunceemennts.. Thhrouugh bacckgrrounnd aanallysiis aand inttervviewws, thee coompaaniees mmustt thhen anaalyzze iin ddeptth tthe traadinng bbehaavioor oof tthesse mmoveers,, deevellopiing traadinng pproffilees ffor eacch oof tthemm. FFinaallyy, ccomppaniies shoouldd usse tthe infformmatiion in thee prrofiiless too prrediict whiich movverss woouldd bee liikelly tto rreacct tto sspeccifiic ccorpporaate annnounncemmentts bby sselllingg orr buuyinng iin tthe shoort terrm aand theen ccalcculaate whaat tthiss woouldd meean forr shharee prricees.44Getttingg too knnow invvesttorss issn’tt a onee-shhot proocesss. Commpanniess muust conntinnuallly reeexamminee whho iis mmoviing theeir shaaress—innvesstorrs ccomee annd ggo. An onggoinng ddialloguue wwithh thhe mmoveers deeepenns tthe knoowleedgee off thhesee coompaaniees aand,, ovver timme, shaarpeens theeir abiilitty tto ppreddictt thhe aactiionss off thheirr crritiicall innvesstorrs. Howweveer, mosst ccomppaniies willl nneedd too beeef up theeir invvesttor rellatiionss caapabbiliitiees tto gget thee joob ddonee. TThe goood nnewss: ggetttingg sttartted isnn’t a mmammmothh taask.. Twwo tto tthreee mmontths shoouldd bee ennouggh tto ddeveelopp ann innitiial sett off prrofiiless off thhe mmostt immporrtannt iinveestoors..IDENNTIFFY TTHE CRIITICCAL INVVESTTORSSA coompaany shoouldd beeginn itts aasseessmmentt byy asskinng wwho hass thhe ppoteentiial to movve iits stoock priice.. Soome of thee mooverrs ccoulld bbe aamonng tthe commpanny’ss laargeest currrennt ssharrehooldeers.. Soome mayy bee smmalller hollderrs wwho wannt tto iincrreasse ttheiir oowneershhip.. Annd ssomee arre ppoteentiial larrge plaayerrs wwho do nott yeet oown anyy off thhe ccomppanyy’s stoock butt coouldd puurchhasee orr shhortt itt inn laargee quuanttitiies.. Whhat do theese movverss haave in commmonn? TTheyy arre aactiive stoock--porrtfoolioo maanaggerss whho rreguularrly buyy annd sselll laargee quuanttitiies of shaaress inn thhe ccomppanyy orr inn siimillar commpanniess—tyypiccallly, mannageers of muttuall, ppenssionn, oor hhedgge ffundds oor eevenn inndivviduual larrge invvesttorss.In ootheer wwordds, invvesttorss whho ccounnt hhavee booth weiightt annd aa prropeensiity to thrrow it arooundd. AAlthhouggh tthe acttuall caalcuulattionns nneedded to putt toogettherr thhe llistt off mooverrs aare commpliicatted——reuirringg moore disscusssioon tthann wee caan ppressentt inn thhis artticlle—aa liikelly mmoveer iis ssomeeonee whho ddoess orr coouldd reeasoonabbly acccounnt ffor at leaast 1 pperccentt off a stoock’’s ttraddingg voolumme ffor onee quuartter..Moveers aree noot nneceessaarilly aa coompaany’’s llarggestt innvesstorrs. Shaarehholdderss (ssuchh ass faamilly hholddinggs oor ttrussts)) thhat havve oowneed bbig bloockss off thhe ccomppanyy’s stoock forr a lonng ttimee doon’tt moove it quaarteer tto uarrterr. NNeittherr doo inndexx fuundss unnlesss tthe commpanny iis aaddeed tto oor ddropppedd frrom an impporttantt inndexx (oor uunleess thee fuund’’s aasseets chaangee drramaaticcallly).. Ammongg thhe llarggestt 200 innvesstorrs oof oone bigg phharmmaceeutiicalls ccomppanyy wee sttudiied,, onnly 10 werre mmoveers,, annd tthiss prroveed tto bbe ttypiicall off thhe ccomppaniies we stuudieed. Whaat iis mmoree, nnearrly hallf oof tthe larrge movverss off thhe sstocck oof tthe phaarmaaceuuticcalss coompaany oveer eeighht uarrterrs ffromm 19999 to 20001 wwereen’tt liisteed aamonng iits 20 larrgesst iinveestoors durringg anny ssinggle quaarteer.Moreeoveer, commpanniess shhoulld aadd pottenttiall innvesstorrs tto tthe lisst oof mmoveers.. Foor aa laargee chhemiicall buusinnesss inn ouur sstuddy, we anaalyzzed thee waay tthe possitiionss off innvesstorrs iin ootheer cchemmicaal bbusiinesssess chhangged oveer ttimee. OOne invvesttor,, a $222 biilliion invvesttmennt ffundd, hhad beeen aan aactiive traaderr inn ottherr, ssimiilarr chhemiicall coompaaniees aand likked to buyy asssetts aat tthe botttomm off a cyccle.. Att thhe ttimee, tthe secctorr waas ddeprresssed,, soo foor tthiss annd ootheer rreassonss wee adddedd thhe iinveestoor tto tthe commpanny’ss liist of movverss. AA feew mmontths latter,, thhe iinveestoor ppurcchassed morre tthann fiive milllioon oof tthe commpanny’ss shharees.Poteentiial movverss inncluude thoose whoo haave madde mmoneey iinveestiing in othher inddusttriees iin ssimiilarr ciircuumsttancces.. Innvesstorrs wwho bett onn thhe rrighht pplayyerss inn ann inndusstryy thhat connsollidaatedd, ffor exaamplle, mayy noow bbe eeyeiing invvesttmennts in othher secctorrs oon tthe verrge of connsollidaatioon. Pottenttiall mooverrs mmay alsso bbe iinveestoors whoo puurchhaseed ssharres in a ccomppanyy’s upsstreeam or dowwnsttreaam ssuppplieers andd haave a hhisttoryy off innvesstinng mmoree brroaddly in thee vaaluee chhainn. SSomee maay hhavee a tasste forr beettiing on commpanniess thhat usee ceertaain cappitaal mmodeels (hiigh cassh ffloww, ssay,, orr hiigh levveraage)), hhavee neew CCEOss, oor ffacee paartiicullar marrkett chhangges or commpettitiive conndittionns.To ddeteermiine howw maany invvesttorss shhoulld ggo oon tthe lisst—440? 70?? 1000?——a ccomppanyy shhoulld ttestt thhe aaccuuraccy oof iits preedicctioons oveer pprevviouus uarrterrs tto aarriive at thee nuumbeer tthatt woorkss beest.. Tooo ffew willl yyielld ppoorr coorreelattionns bbetwweenn acctivvityy annd sstocck ppricces;; tooo mmanyy wiill addd too thhe ccostt annd ccompplexxityy off thhe pproccesss. IIn aaddiitioon, thee liist chaangees ffreuenntlyy. OOur expperiiencce ssugggestts tthatt a movver typpicaallyy sttayss onn suuch lissts forr siix uarrterrs—llongg ennouggh tto ggivee thhe ccomppanyy tiime to beccomee faamilliarr wiith it butt shhortt ennouggh sso tthatt thheree wiill alwwayss bee neew mmoveers to stuudy..MOVIING THEE MOOVERRSOncee a commpanny hhas ideentiifieed iits movverss, tthe nexxt sstepp iss too deevellop thoorouugh proofilles of alll off thhem.. Coompaaniees bbegiin bby ccondducttingg ann "ooutssidee-inn" aanallysiis oof eeachh onne, inccluddingg itts sstatted invvesttmennt ccritteriia aand objjecttivees aand itss trradiing pattterrns.. Diiscuussiionss wiith eveery invvesttor givve aa coompaany a cchannce to filll iin tthe gapps iin iits unddersstanndinng oof iits movverss annd tto cconffirmm itts hhypootheesess abboutt whhat theey ttradde aand whyy.The ressulttingg prrofiile shoouldd fiirstt deescrribee hoow aan iinveestoor mmakees ddeciisioons.. Whhat doees tthe invvesttor wannt tto iinveest in,, ussingg whhat valluattionn meethoodollogiies?? Hoow iis iit llikeely to reaact to eveentss orr too daata,, whhichh affterr alll ccan be intterppretted in manny wwayss? AAre itss innvesstmeentss suubjeect to anyy coonsttraiintss, ssuchh ass thheirr siize andd frrequuenccy? Seccondd, tthe proofille sshouuld desscriibe eacch iinveestoor’ss viiewss onn isssuees tthatt thhe ccomppanyy miightt faace——succh aas aany neww sttrattegiies (foor iinsttancce, wheetheer tthe commpanny sshouuld go intto CChinna),, eaarniingss suurprrisees, andd chhangges in mannageemennt.To gget thiis kkindd off innforrmattionn, ccomppaniies musst pphraase thee quuesttionns ccareefullly in vieew oof aa USS Seecurritiies andd Exxchaangee Coommiissiion (SEEC) reggulaatioon tthatt prrohiibitts ccomppaniies froom ddiscclossingg maaterriall innforrmattionn too soome butt noot aall invvesttorss.5 Tyypiccallly, inddireect queestiionss woork besst. A ccomppanyy miightt assk iinveestoors whyy thhey purrchaasedd orr soold theeir holldinngs in a ppartticuularr buusinnesss, ffor insstannce.. Buut tthe commpanny wwoulld aactuuallly bbe ttryiing to unddersstannd wwhy theey ssoldd thheirr hooldiingss affterr thhe bbusiinesss aannoouncced,, foor eexammplee, tthatt itt waas iinveestiing in Chiina.. Doo thhe iinveestoors disslikke tthe rissks thaat aare asssociiateed wwithh Chhinaa, ddisttrusst tthe mannageemennt tteamm puut iin pplacce tto mmanaage exppanssionn inn Assia,, orr reejecct sspeccifiic ddetaailss off thhe ddiscclossed plaan?The preecisse fformmat of thee prrofiiless wiill varry ffromm coompaany to commpanny, deppenddingg uppon thee deecissionns aand eveentss itt exxpeccts to facce. Howweveer, thee coonteent of eacch pproffilee shhoulld ffocuus oon ppreddicttingg hoow eeachh innvesstorr wiill reaact to speeciffic corrporratee evventts ((Exhhibiit 33). Commpanniess wiill wannt tto ccolllectt thhe iinfoormaatioon iin aa daatabbasee whheree itt caan bbe uupdaatedd reegullarlly.MAKIING PREEDICCTIOONSWithh thhe mmoveers ideentiifieed aand proofilled,, thhe iinveestoor rrelaatioons staaff andd exxecuutivves cann maake reaasonnablle jjudggmennts aboout whoo wiill selll, buyy, aand holld. Thiis pproccesss issn’tt。