Contrasting Tesla Tweets: Why it Matters Why Elon Musk Wants to Sell Tesla
Elon Musk is always good for a surprising tweet that has an effect on stock prices. The most recent tweets concerned his willingness to sell Tesla stock. In the most recent case, he started a Twitter poll where he asks if he should sell 10% of his stake in Tesla to trigger a tax event (see the picture).
The Monday after this Saturday tweet we immediately observe that the Tesla stock loses about 4% of its value in pre-market trading (see the picture). Although, it is always difficult to pin down a market movement to one reason when you have only one event, it is not unreasonable to assume that such an announcement of the largest shareholder in a company has an impact on price. The question is why?
It could be the case that because Elon Musk increases the supply of Tesla stock the price goes down. An argument that is often mentioned when discussing price movements. More supply with the same demand equals a lower price. It could be that market reactions are unreasonable and sentimental, and we see an overreaction to an event that could be unrelated to the underlying business. Why would Tesla be worth less just because Elon Musk is selling part of his holdings? Finally, it could be because the selling of Tesla shares gives investors information on the value of Tesla. In other words, Elon’s willingness to sell signals insider information: if you believe that Elon Musk knows more about the company than you do, him being willing to sell stock gives you information on his estimation of the value of the company.
To further investigate which effect we observe, we are lucky enough that Elon Tweets vigorously. Even better, Elon has written a similar tweet suggesting him selling some of his stocks a week earlier, i.e., 31 October (see picture).
In this tweet he announced his willingness to sell Tesla stock if it contributes to the solve the problem of world hunger. Although the magnitude of this announcement is not as large as the 10% stake from 6 November, it is considerable. The tweet happened on a Sunday, so we’re going to compare the price of Monday to the closing price on the Friday before. We observe that the price of Tesla increased from 1114 (Friday, 29 October) to 1208.59 (Monday, 1 November). This means that the price reaction was positive. Contrast this to the negative price reaction for Monday, 8 November. Why these differences?
The explanation is that the two motivations for the announcements to sell the stock, and thus the signal it exerts, are very different. On 6 November Elon Musk asks if he should sell to pay more taxes. If you do not believe that he gets pleasure out of paying a higher tax bill you can infer that he sells the stock because he thinks that the current price is too high. Elon, with more knowledge about Tesla than the majority of the investors, is likely to know.
Even if you only believe that there is a small probability that this is the case, it must negatively affect your price for Tesla stock. On October 31 he tells us that he wants to sell the stock to solve world hunger. It is not unreasonable to believe that he, out of all people, would be willing to give up 2% of his wealth to solve such a large-scale problem. Irrespective, of this being true or not. His willingness to sell Tesla has nothing to do with his valuation of the company, and therefore does not update your valuation of the company. And in this contrast lies our argument: it is probable, and shown by the stock prices, that the market beliefs his intentions to solve world hunger, but not his need to pay tax.
Now, in an ideal world, with experimental rigor (or perhaps a multiverse), we would have Elon tweet the same tweets in the opposite order: first the tax tweet, followed by the world hunger tweet. It is possible that the stock reaction to the second tweet follows a sequential additive causality, namely Elon is trying to sell his stock yet again within a short time frame. However, the fact that we see a positive reaction in the first tweet hints at our prior conclusion: it’s not just the selling, but the underlying belief and justification that signals the value of a stock! And it only costed Elon Musk around 8 billion to give us this insight.