Does CEO Drama Affect Stock Price?

PUBLISHED Jul 24, 2022, 10:52:44 PM        SHARE

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As an investor, should you care if the CEOs and presidents of corporations are make bad waves in the news cycle? In the news once again is Tesla and SpaceX CEO Elon Musk, who is going viral for apparently having an affair with the estranged wife of Google co-founder Sergey Brin. Brin divorced his wife in January...and also told his financial advisors to sell all of his personal investments in Musk's companies. This news, coming on the heels of Musk's decision to abandon his purchase of Twitter (for which he has been sued by Twitter) and news that Musk's father has a secret child with his own stepdaughter, makes Musk a highly controversial figure.

Does this personal drama have any substantial effect on stock prices?

Do Investors Care About the CEO?

Elon Musk may have controversial behavior, but do investors care about CEO behavior? Apparently, the relationship is only strong when there is a change in leadership. Investors scrutinize new CEOs over their likelihood to change business strategy, which might affect financial metrics.

Other evidence suggests no long-term correlation between initial CEO reputation and stock price. Since Musk is not a new CEO, there will likely be little change in investor sentiment toward Tesla.

Illegal Behavior Can Hurt Stock Price

The Musk-Brin scandal may not hurt Tesla's stock, but Musk's alleged tendency to manipulate stock prices by making sudden announcements on social media might. This is because government fines and civil lawsuits cost money, which hinders corporate profitability. Investors may also be wary of being manipulated themselves and shy away from stocks that may be artificially "pumped up" by CEOs.

However, just like news about CEOs themselves, news of corporate scandals typically only affect stocks substantially in the short term. This may be due to corrective actions taken by firms caught up in scandals. Therefore, even Musk's alleged stock manipulation via social media should have no long-term affects on Tesla stock.

But Big Companies Survive

How much harm a CEO can cause to a corporation appears to depend largely on the firm's size. Large corporations, like Nike, Facebook, and Volkswagen, survived scandals relatively unscathed in the long term despite intense media criticism. Most of these scandals did not directly involve CEO personal misbehavior. However, many of these large corporations had CEOs that were not closely tied to the firms' reputations, meaning they could be replaced by corporate boards relatively easily in the event of a crisis.

A major scandal involving Elon Musk directly could have more of an impact on Tesla's stock due to the close ties between Musk and Tesla. CEOs of most large corporations outside of the media-savvy tech sectors are often relatively unknown to the general public, allowing for a degree of separation between CEO misbehavior and corporate reputation. Replacing the CEO of a generic manufacturing firm may not top the news cycle, but a board trying to replace someone like Elon Musk definitely would!

Bottom Line: Elon's Hijinks Won't Hurt Tesla

Tesla's stock is doing well, and Elon Musk's sex scandals probably won't hurt it at all. Despite the richest man in the world being popular fodder for the media, investors are likely far more concerned with the financial reports of his companies and the general condition of the economy. Despite fellow billionaire Sergey Brin angrily selling his personal investments in Musk's companies, those stock prices have not fallen. Even a billionaire spat isn't enough to affect the market!

I/we have no positions in any asset mentioned, and no plans to initiate any positions for the next 7 days

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