David Yermack, a professor at NYU’s Stern School of Business, studied the first lady’s impact on apparel stocks for companies associated with outfits she wore.
What does this have to say about celebrity endorsement of stocks and companies? I ask David about this and more on this week’s episode of Tradestreaming Radio.
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Zack: Welcome to Tradestreaming Radio. I’m your host, Zack Miller, and this is the place where investors go to learn directly from experts. I hope to bubble up tools, tips and technologies to help you make better, smarter investment decisions.
Today’s guest is David Yermack. He’s a professor at NYU’s Stern School of Business. He wrote a paper in December called, “The Michelle Markup: The First Lady’s Impact on Stock Prices of Fashion Companies”. I thought it was a very interesting paper, not just because it sort of was in vogue at the time, but also because I think there’s a lot of research to be done about celebrity endorsement of companies and the impact on stock prices.
This was really one of the first rigorous attempts of its kind. Yermack looked at changes in apparel company stock prices when Michelle Obama wore designer outfits at public events. There were some blogs that actually followed this type of information, and he found something very interesting. He found that company stock prices rise significantly when the First Lady wears their clothing, increases about 1.7% in the week following her most closely watched appearances and by about half as much after routine events. That’s pretty interesting, and the stock prices continue to go up afterwards. It wasn’t just a blip on the screen. There was some drift involved.
I invited David on to talk a little bit about his research, about where the research idea came from and maybe where it might lead. Thank you, David, for participating in Tradestreaming, and thank you all for listening.
You can find this podcast as well as archives of all my shows on our website,tradestreaming.com. You can also find the archives of this program on iTunes. Check it out over there. I have a free weekly email on my website, Tradestreaming, so come over there, sign up for it. I provide research like this as well as an overview of everything happening in online finance/research/media, everything having to do with making better investment decisions, I’m all over that. Thank you for listening. I’m grateful for your time and hope you enjoy the show.
David: Yes, I’m David Yermack, and I’m a professor of finance at the NYU Stern School of Business.
Zack: And what kind of concentration have you done with your research?
David: Most of my research is in corporate finance, corporate governing.
Zack: So what led you to this paper where I stumbled across your name, “The Michelle Markup: The First Lady’s Impact on Stock Prices of Fashion Companies”?
David: I have to give a lot of the credit to my wife. She follows fashion very closely and when the Obamas made their first European trip in April of 2009, there was a lot of worldwide media coverage, and she pointed out to me, quite correctly, that certain fashion stocks were performing exceptionally well basically because Michelle was wearing the outfits tied to certain designers. I confirmed this by looking at a few of them and I said, “This would be a great research paper if you knew what Michelle wore every single day.” Then she showed me that, in fact, there were blogs that tracked this.
Zack: Can you give me an example of one of those blogs?
David: Yeah. The best known is called Mrs-O.org and it essentially tracks all the First Lady’s public appearances and then identifies the garments and designers that she wears. They have about 10,000 visitors a day, many, many more sometimes for highly visible events, but for my purposes it was ideal. It was an archive, essentially, of all of the Obamas’ major public appearances where Michelle was present, and I was able to reconstruct a year’s worth of data, about 400 data points of different garments that she’d worn.
Zack: Wow! And then you looked at the impact on what type of companies, actually the manufacturers of the clothes, the distributors, the retailers?
David: The manufacturers and the retailers, and it turned out that both of them benefit very strongly. On the very day that Michelle Obama wears an outfit that is either made or sold by one of those companies, the stock may rise 1 to 2%, depending on how important the event is, how big the audience is and so forth.
Zack: Does that return trail off over time?
David: No. It seems very permanent. One of the first things that I expected to find was that this would be some kind of short-term overreaction . . .
Zack: Like a blip.
David: . . . amongst small investors. You see this sometimes with other things in the stock market. But it’s really very permanent. You can run this out for several weeks, and you don’t see any evidence that the effect reverses. It’s a lot of money for the companies involved in terms of the appreciation in their market capitalization.
Zack: You mentioned in the paper there’s something like a $5 billion market cap boost in that first week?
David: Yeah, that’s if you aggregate over all the appearances that she made, that’s approximately what it was worth to all the publicly traded companies that were involved. Many more private companies that we don’t get a daily stock price for also, without question, went up in value as well. So, $5 billion, I think, would be a lower bound. It’s really an enormous amount of value creation by one person.
Zack: It’s amazing the impact she has. Is it an investable strategy? Meaning, do people have time, once they figure out what she’s wearing to the event or she’s already wearing it, do you have time to get in at that point?
David: No. It’s like most information in the stock market, you really need to be on top of it pretty quickly. Although, I should say that the data that I have shows that it takes a couple days for the full effect to trickle in. I think that the real money is probably made on day one, but if you’re really on top of this you may still pick up a profit by investing the day after and so forth.
A lot of these events are overseas as well. Sometimes if the Obamas are attending some event in Europe or Asia, it may be the middle of the night in the U.S. so if you’re very much on top of this and perhaps, if she’s wearing a garment made by a foreign company that trades on the European exchanges and so forth, you might be very early to the market and be able to trade on it that way. But I think most of the time, it’s just a lot of attention and anticipation, and so I think investors jump on this pretty quickly.
Zack: How quickly does Mrs-O, the blog that you mentioned, actually get the daily outfit up?
David: I know that, essentially, the blogger’s watching this in real time, but she is conscientious about confirming the identity of the manufacturer before she’ll actually post it so it may take an hour or so or sometimes even longer if it’s a somewhat obscure maker and the event is not as well publicized. This past week for the State of the Union address, I was paying close attention, and the designer was identified by some people within 20 or 30 minutes and the particular blog I refer to, I think took more than an hour, and that was just because she was being very diligent about confirming the identity of the maker.
Zack: In your opinion, is this something very specific to Michelle Obama? Do we have this effect with other celebrities’ endorsements and stuff like that?
David: I’ve looked very closely at whether you can find this elsewhere with people such as Kate Middleton, Carla Bruni, and for research purposes it’s problematic because Michelle Obama’s schedule is much more active than most of these other folks. Michelle has upwards of 300 public appearances a year, and Kate Middleton may go out once a week so I don’t really find a lot of evidence of other people moving the market anywhere near the way Michelle does but I think you need to be very cautious simply because of the frequency being so different.
For research purposes, the First Lady is ideal because not only does she have a very busy schedule, but she tends to choose many different designers, more than 50 in the year that I followed her schedule. I think other people are much more predictable. Carla Bruni, for instance, wears Dior every time she goes out and that’s good for Dior, but it’s not very good for research purposes because there’s no suspense whatsoever what it’s going to be.
Zack: Right. Has this spurred on other areas of research that you plan to do afterwards or is this sort of just a one-off, piqued your interest . . .?
David: I would like to stay in the area. I think now that I’ve gotten into the topic, I realized that there are a lot of very basic questions about the value of a celebrity and the value of a brand that we haven’t made much progress on on the academic side. I think it goes a little bit beyond the fashion industry, but to understand the intersection between marketing and finance and what types of advertising really do affect the value of a company and what’s the half-life of a celebrity’s popularity and which celebrities endure and remain marketable for decades and which ones do not.
These are really questions of first order in importance that I would like to find other data to investigate. I think there’s a big audience for this research. The First Lady is really an ideal person to look at, and I wish there were more. I have my eyes open but up to now, I haven’t found a follow-up person or event or product category maybe, to look at but hopefully I will.
Zack: Did you see last year there was a rapper, 50 Cent, who was, I think, pushing like a penny stock on Twitter? Did you see that whole hullabaloo?
Zack: Yeah. I mean, it was amazing because just with one little endorsement, the thing went flying.
David: I bet it didn’t last very long.
Zack: No. No.
David: This is something that the arbitragers would step in against.
Zack: And the regulators.
David: And the regulators, for that matter. I mean, Twitter and a lot of the social media raise interesting problems about who’s disclosing what and whether it’s covered by the securities laws, but none of it really applies to Mrs. Obama. All of the evidence is that she has a pretty permanent impact on the companies that she chooses to associate herself with. As far as I can tell, there’s nobody, anywhere in the world that is anywhere near as valuable in terms of the implicit endorsement of a product.
Zack: She’s the $5 billion lady.
David: Yeah. I mean, you look around at other athletes and celebrities, and even the very highest paid product endorsers don’t begin to approach anything on the scale of what Mrs. Obama appears to be worth. I think part of this, of course, is that she’s not being paid to do it. She’s not a commercial endorser, but the products that she adopts are done sincerely on the basis of merit, which is usually not the case with people who do it for a living.
Zack: Right. One thing I found interesting is part of your research is that you used, like, Google searches for the products as a proxy. Can you talk a little bit about that?
David: One thing that I really would love to do is get a direct nature of the product sales of the given garment. So, Michelle Obama wears a dress to a state dinner; how many garments are actually sold the next day? I talked to a lot of apparel companies to try to get this data, and I found out that most of them actually don’t track it at that level of detail but if they did, they are reluctant to make it public.
The best approximation that I could come up with is Google searches. A lot of clothing is sold by e-commerce now, and Google is very good about putting free data out there so that you can see on a given day what actually happens to a given designer’s searches. I found that there’s a really big spike. If Michelle Obama wears a dress, it is something that almost immediately leads to an upward spike in the number of searches people are doing for the designer’s name on the Internet.
I would assume that many of those searches, downstream, turn into product orders at websites and what they’re searching for is where they can buy the dress basically. It’s really a pretty strong effect, and I think it would be nice to get other data to confirm this but, for the moment, it’s the best I can do as a proxy for sales data.
Zack: There are a few other researchers looking at the connection between Google search volume and trending to stock prices. Do you see that playing an impact? You’re actually looking at, like you said, downstreams for a conversion of a search to turn into a sale, but do you think there’s also a connection between searches and stock prices?
David: It’s a good question. There’s one other article that looks at the search as a measure of small investor buzz.
Zack: Like attention, right?
David: Yeah, and they find significant effects. They aren’t as strong in magnitude as the ones I find for Mrs. Obama, but nevertheless, they find that stocks that have a lot of small investor buzz is measured by these searches for the name of the stock. They basically trade at a premium, although they found that in the course of a year, the premium tends to disappear. I think just generally, you’re getting a lot of social media data about Facebook visits and Twitter feeds and whatever that potentially is a gold mine for, not only academics, but for people who work in the area of e-commerce and so forth. I think it’s an interesting time because the amount of material that’s being surfaced on the web is just unprecedented and probably only going to increase in the coming years.
Zack: One question that I ask all the guests on the program, if there’s certain resources that you find online, offline that you go to, either for your own investing or your own research that you could recommend to my audience.
David: Actually, you’ll probably be pretty disappointed. I index all of my money like a good finance professor should. I have 100% of my money in low- cost, low-overhead index funds. You should just simply diversify as widely as possible and minimize transaction costs. That’s the advice I would give to any student and certainly to the audience of this program as well.
Zack: Are you looking at any allocation models, you do that yourself, or do you do some type of benchmark?
David: No, I just use a pretty casual rule of thumb. I put about two-thirds of the money into the U.S. Index funds and one-third into international index funds, and I think diversifying internationally is something that people overlook. It’s a very simple strategy but one that will get you all the benefits of diversification over time. I think another thing that I will have to begin to think about as I get older, to shift out of stocks and into bonds, like anybody should. This will interact, of course, with issues related to my kid’s college tuition and my expected retirement date. It’s a complicated problem for anybody but I’m still reasonably young, and so I just essentially use equity index funds for nearly all of my investing.
Zack: Interesting. Any word on sort of target date funds? Are you familiar with those? Where it’s sort of like they’re sort of baked in products that do the allocation or you as you step down towards retirement?
David: Yeah. I’ve seen those. I’ve not looked at them closely, but it sounds like an intriguing idea because I think there’s research that people really don’t rebalance their portfolios as often as they should. In particular, you’re seeing a lot of sad stories come out of the financial crisis where people were heavy into real estate or stocks and had really not taken account of their retirement horizon. As you do get older, you need to shift into more and more secure assets to lock in what you’re going to live on in retirement, and if there’s a fund that will do that in a logical way for you, it’s perhaps a good product.
I think you can’t lose sight of the fact that everybody’s needs are different. It depends on things like, “Do you expect to inherit from your parents? Do you have major tuition expenses for your kids? Are there illnesses in the family?” I would be hesitant to just recommend rules of thumb or just everybody should be in this one fund that does it automatically because the individual circumstances are important for anyone, and you should see a financial planner who can help you with these things.
Zack: David, thanks so much for spending time with us. It’s been a great conversation.
David: OK. My pleasure.