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Why Apple's shares rose after Steve Jobs resigned

CEO resignations often cause share prices to rise. Witness the effect of the latest CEO departure on Yahoo!. This typically happens because CEO replacements are not necessary when companies are successful. In times of crisis, the market sees management change as a hopeful sign. But Apple is doing well. So it was commonly believed that if Steve Jobs were to leave the helm at Apple the stock would fall. However, as the chart below shows, the stock price has since risen.

Apple’s share price rise of 3% even out-performed the Dow Jones index, and this phenomenon is not for the short term only. The Jobs resignation sent Apple puts to one-year lows.

So how do we reconcile this? How can such a valuable person be priced as a liability?

First, I should mention that not everyone shared the opinion that the departure of Steve Jobs would cause a decline in the price. Over a year ago, in August 2010 Horace wrote in a comment:

Since I’ve shown repeatedly that Apple is trading at a discount to its growth and to its historic value and to its peer group, and since the health of their CEO is an uncertainty which must be discounted, the possibility exists that the depressed value assigned to Apple is due to Steve Jobs’s continuing presence in the company. If that is true then his departure should increase the stock price.

His argument of why the departure of Steve Jobs would cause an increase in the stock price was based on the fact that the market would have discounted it and the only question would be when it would happen. Since that uncertainty of when was unresolved, it would weigh on the shares until the uncertainty would be lifted and the price would resume its value based on other factors.

To demonstrate that effect, we can turn to data. The discounting was visible in the reactions of the stock in previous events when the tenure of the CEO came into question. Those reactions are shown in the following chart:

Each of the bars above shows the cumulative abnormal returns after all the events when tenure issues cropped up in the news.

If we excluded the first time we learned about Steve Jobs’ health issues, we can see that the stock market likes certainty (January 5th, 2009: health issue but remains CEO; August 24th, 2011: definite resignation as CEO) and rejects uncertainty manifested in medical leave announcements on January 14th, 2009 and on January 17th, 2011 leaving the top organization in a temporary form. We can also see that Apple investors are becoming more comfortable with Tim Cook running the company as the negative cumulative abnormal returns diminish and turn into positives ones when he is appointed CEO.

We can conclude that Steve Jobs’ resignation as CEO, as sad as it may be, has reduced unsystematic risk from the stock and therefore “boosted” the share price performance.

 

  • KGB

    Nice job, Dirk!

  • Vv

    Or, some people expect a good iphone5 launch and bought shares now in preparation for the event.

    • http://twitter.com/disc1979 Dirk Schmidt

      Information and rumors regarding iPhone 5 were around before and after the tested event.

  • http://twitter.com/PaulMaxime Paul Franceus

    Dirk- Welcome to the blog. I didn’t realize it wasn’t Horace until you quoted him. I too was pretty sure that Steve resigning, and especially Apple showing that it had a long term transition plan in place would boost the stock price. The real tale is going to be told at the next earnings release or major product announcement.

  • Canucker

    Steve Jobs actually stepping down gives the naysayers one less arrow to shoot at APPL. There are plenty of other false liabilities built into the stock (such as the inevitable domination of the iPhone by Android, the domination of tablets by Android, not to mention the “irrelevance” of the Mac line, the vulnerability of a “luxury goods” producer to recession, etc.). It’s only when there is incontrovertible evidence that these are falsehoods, that their impact on stock is removed.

  • Anonymous

    Correlation does not imply causation. A few others things are happening:
    – iPhone 5 launch coming up
    – good safe replacement for Jobs
    – interesting leaks about iPad3 (and Android tablets issues)
    – success of some lawsuits
    – Google buying Moto, which does complicate the Android landscape
    – …

    I’m not sure you’ve probably accounted for all fo that.

    • http://twitter.com/pberry Patrick Berry

      I think it is important to say that there was a large contingent of people that were very sure that once Jobs left Apple stock would go down and _stay_ down, despite all of the factors that you mention. This is clearly not what happened.

    • Anonymous

      Indeed, as Patrick points out, the Web has been full of articles for years, saying: “The day Jobs leaves, AAPL will decline by 25%” (where the percentage varies, but the essence stays the same).

      There were even a number of articles written, based on AAPLs brief after hours decline following Jobs’ announcement, saying much the same in present tense.

      None of these stories said “unless iPhone 5 is right around the corner, in which case the stock will go up”. Investors new as much about the iPhone 5 in the days before the Jobs announcement as in the days after, or about the iPad 3 or that Tim Cook would be his replacement (if they were paying any attention whatsoever). The variable amid all the constants was Jobs no longer being CEO of Apple…

    • Anonymous

      That describes last year also. And the year before. Just decrement the version numbers. You are describing “business as usual” for Apple. What is truly unusual right now is that the demigod co-founder has stopped being CEO for the first time in 15 years. Everybody thought that would mean a stock hit, just like everybody thought iPad would be $999. The fact the stock went up is man bites dog.

    • http://twitter.com/disc1979 Dirk Schmidt

      By using an cumulative abnormal return analysis with a 3-day and a 5-day window the t-test showed statistical significance at levels of 5 and 10%.

    • Westechm

      Amen. Dirk, I believe that you are over interpreting normal market noise.

      • http://www.asymco.com Horace Dediu

        The analysis is specifically designed to eliminate market noise. That’s the point of this CAR calculation.

      • Westechm

        I don’t buy it. Show me a statistical test that demonstrates that the association is real.

      • Anonymous

        Stop thinking in terms of stock price, think in terms of the dramatic drop in volatility.

        iPhone 5 launch coming up: There was no reason for the upcoming iPhone 5 launch to result in an abrupt reduction in implied volatility, quite the opposite in fact. the iPhone-5 launch will introduce significant extra volatility.

        leaks about the iPad 3: Again not relevant or even timely, there was no significant news about the iPad3 that week, and rumours would again only increase volatility.

        lawsuits: we’ve only had a few minor preliminary results, in germany & australia insufficient for such a substantial vol decrease. We’ve also seen significant new legal issues crop up such as the slide to unlock patent being found trivial in the netherlands, a new patent troll on the horizon and significant new patents in the possession of HTC.

        Google buying Moto: again this increases vol rather than the opposite, because it acts to increase the range of possible future outcomes for android and hence iOS. Even if you believe that it is positive for Apple’s share price you cannot believe that it will make Apple’s share price less volatile over the medium term.

        Good safe replacement: This is valid, but it’s part of the overall story – ie. that replacing Jobs with Cook has been perceived as a risk reduction. Nobody is saying that Jobs being replaced with a horse named Incitatus would have resulted in reduced risk.

      • Westechm

        Obviously people are relieved that the world didn’t end when Steve stepped down. It’s also obvious that the longer Apple goes without a collapse attributable to Tim Cook, the more confident people will feel, myself included.

        It’s also obvious that events on the stock market are usually (not always!) unconnected to news stories although the media always comes up with some inane reason for the latest up or down. Most of these are noise, sometimes random, sometimes initiated by computer programs, sometimes by outright stock manipulation. A major event, such as an earnings announcement, is is not noise, although major market movers may have already discounted it.

        Leaks, rumors and lawsuits on which you comment merely generate noise. The stock went up a few per cent? As JohnDoey says (below) “business as usual for Apple”.

      • Anonymous

        As I said – ignore the small stock movement, look at the crash in implied volatility. Guys writing options on Apple made serious bank the day that Steve quit – it wasn’t a small movement, and it certainly wasn’t business as usual.

      • Westechm

        I apologize for not being clear. Let me try again.

        When an event happens, some people react to the event. Other people expect that there will be a reaction and may act on that expectation. For example, when Steve Jobs resigned, there may have been some people who sold short on the expectation that the market would go down with the expectation that they could buy at a lower price. At a certain price a computer may be programmed to sell or buy. There are many ways to game the market. What I am saying is that this is all noise generated by these actions. When the noise settles, the market may be higher or lower. I don’t feel comfortable to attribute the new level to a greater comfort in feeling by the investors. Longer term, when it becomes apparent that Steve Jobs resigning is not the end of Apple, the feeling of comfort will grow. It will take a long time to see the impact of Steve Jobs resignation on Apple.

        Put another way, the events are real. The attribution is uncertain because of the noise.

        FWIW, Apple followed the Dow industrial average until the first week in July. Since then Apple is up ca 15% and the Dow is down ca 10%, but large daily changes in the Dow are mirrored, more or less, by large daily changes in Apple although the size may be different. Bothe have been very volatile. If you look at the supposed price changes after SJ resigned they get lost in the greater trends.

      • Anonymous

        I understand your point, but you still don’t seem to understand mine (and I believe Dirk’s)

        a) There was a 14% drop in implied volatility since Jobs resignation that is far larger than normal movements.

        b) A drop in implied volatility implies a drop in perceived risk. Thus a drop in vol is particularly significant given that global economic risks are affecting almost all asset classes.

        c) Investors demand greater return for greater risk, thus a removal of risk has a positive effect on stock prices.

        Which if any of these don’t you accept, because if you accept all three you have to allow that Jobs resignation has had a positive effect on share prices.

      • http://www.asymco.com Horace Dediu

        The chart shows cumulative abnormal returns. See http://en.wikipedia.org/wiki/Abnormal_return

        “In stock market trading, abnormal returns are the differences between a single stock or portfolio’s performance and the expected return over a set period of time.[1] Usually a broad index, such as the S&P 500 or a national index like the Nikkei 225, is used as a benchmark to determine the expected return. For example if a stock increased by 5% because of some news which affected the stock price, but the average market only increased by 3% and the stock has a beta of 1, then the abnormal return was 2% (5% – 3% = 2%). If the market average performs better (after adjusting for beta) than the individual stock then the abnormal return will be negative.”

  • http://www.privilegedequity.com/ Privileged Equity

    Dirk – love your contribution, but really this sort of analysis needs to take into account whole market movements. Unfortunately, Apple stock price doesn’t move in a world of it’s own, and in a month with significant market volatility (Europe sovereign crises, US uncertainty etc) the markets as a whole have moved up/down independently of Apple (with Apple’s stock price proportionally following suit).

    It would be interesting to see the same historical analysis having excluded market-wide movements.

    • http://twitter.com/disc1979 Dirk Schmidt

      Expected vs. actual returns take into account market movements and Apple’s risk expressed as beta.
      Introduction to the methodology can be found here: http://en.wikipedia.org/wiki/Abnormal_return

      • http://www.privilegedequity.com/ Privileged Equity

        Apologies Dirk – I should have read the article more carefully.

      • http://twitter.com/disc1979 Dirk Schmidt

        No apologies needed. I took the paragraph with the scientific background out of the final version.

  • Gwkung

    Dirk,
    Thanks for your post.
    Your insights are a nice addition to Horace’s comments.

  • MOD

    I am glad Steve Jobs is gone. Now I can buy one of those newfangled computers without having to drink the KoolAid or fly in a spaceship.

    • Anonymous

      SJ is still at Apple, as COB.

      He’ll have more time to fcuk with our minds, since he has no load of being the CEO now.

  • Anonymous

    It would be interesting to see how the resignation affected the implied volatility surface. If your contention is correct that risk has been removed, and i think it is, then we should see a significant drop in implied vols.

  • Anonymous

    It would be interesting to see how the resignation affected the implied volatility surface. If your contention is correct that risk has been removed, and i think it is, then we should see a significant drop in implied vols.

    • http://twitter.com/disc1979 Dirk Schmidt

      You can read the article mentioned in the post: “Volatility for three-month options at the current stock price fell to 1.07 times the level of historic volatility, down from this year’s peak of 1.9 in February. ”

      http://www.bloomberg.com/news/2011-09-06/apple-bears-depart-as-jobs-resigning-sends-puts-to-one-year-low-options.html

      • Anonymous

        Thanks, very interesting – the decrease in volatility strongly supports the idea that Jobs’ retirement removed a risk factor from investors perspective.

        The stock’s implied volatility has dropped 14 percent to 35.72 yesterday from this year’s peak of 41.71 on Aug. 8, data compiled by Bloomberg show.

  • Pieter

    Could the followinbe the reason Dirk?
    The market values a (technology) company on a one to two year performance horizon. The massive earnings momentum created under “Jobs” should be maintained for at least three years and the market realizes this.

    • http://twitter.com/disc1979 Dirk Schmidt

      The upside has been there before and after his resignation. What was removed was unsytematic risk – risk quantified in the capital costs. If risk/capital cost decrease, value increases.

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  • Jkoch

    See “Do Investors Care If Steve Jobs Is Healthy?” Atlantic Economic Journal, 39 (2011), R. Fenili and R. Cebula, co-authors. This article examines a longer string of Jobs “events” and concludes that for the most part investors do not care about Jobs’ health. Either they already
    have discounted his health problems, or they simply do not believe he os pr was a key.

  • Joules98598

    I just can’t agree with this analysis. If anything, the stock fluctuation was natural variation. The market already discounted his projected departure. The true test will be how the stock responds if apple fails to offer anything innovative within the next two years, after it has exhausted the current pipeline unsure jobs’ guidance. Apple will need to do something because, regardless of what everyone thinks, the current generation of tablets are catching up and apple knows this. This is why apple is suing samsung. If apple fails to come out with something innovative, then it is a given the stock price will drop far more without Steve jobs at the top. The market assumes that the current Steve jobs pipeline is competitive and therefore believes that projected sales are “safe.” After this period, it’s a brave new world for apple.

    • Anonymous

      I think the market had discounted Steve Jobs’ departure, but across all the possible departure scenarios. When the actual departure was at the more benign end of the spectrum (obviously planned, clearly communicated, well understood CEO successor and new COB role) the discount was returned.

    • http://www.asymco.com Horace Dediu

      If Apple had failed to come out with something innovative, then it is a given the stock price would have dropped with Steve Jobs in charge. I don’t have to hypothesize actually, it has had massive (as much as 40%) drops within his tenure on the anticipation of a failure. I can cite three examples:
      1. the first time iPod sales dropped year/year
      2. The switch to Intel for the Mac
      3. The introduction of the Macbook Air.

      The third example is discussed here: http://www.asymco.com/2011/01/12/remembering-january-14-2008-the-day-the-market-lost-faith-in-apple/

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