NCPA - National Center for Policy Analysis

CEO's HOME MAY FORETELL STOCK PRICE

April 12, 2007

Investors looking for stock-picking tips might find the answer right at home -- not their own, but where CEOs live.  A new study makes the case there is a strong correlation between executives' home-buying behavior and stock performance.

The bigger the CEO home, the worse the company's stock fares, according to two academic researchers, who also found that companies with CEOs living in more modest abodes often see their shares outperform.

According to Arizona State University's Crocker Liu and New York University's David Yermack, who teach finance at their respective schools:

  • A supersized home purchase shows entrenchment; a CEO might feel secure in his position and therefore isn't concerned he is going to have to leave any time soon.
  • Of course, entrenched CEOs can win in the corporate world, and the time and money involved in buying lavish properties could be a sign they are making a long-term commitment to their companies and communities.
  • But the purchase of a megamansion could also symbolize that CEOs view their homes as being more important than their companies, and that many sell company stock just before it peaks to buy and furnish their expensive new digs.

Their findings show a privileged class:

  • The median home was valued at $2.7 million -- more than 10 times the median sales price for all U.S. homes in 2004.
  • It included 11 rooms plus 4.5 bathrooms, with a floor area of more than 5,600 square feet and a median land area of 1 ¼ acres.
  • Some 12 percent of CEOs' homes are on waterfronts, and 8.5 percent are next to or on the grounds of golf courses.
  • The median CEO lives 12.5 miles away from corporate headquarters, though 6 percent of those in the study lived more than 250 miles or more away -- meaning it takes a plane ride to get to the office.

Source: Rachel Beck, "When your CEO buys a megamansion, is it time to dump stock?" Associated Press/Seattle Times, April 11, 2007; based upon: Crocker H. Liu and David Yermack, "Where are the Shareholders' Mansions? CEOs' Home Purchases, Stock Sales, and Subsequent Company Performance," Arizona State University/New York University, March 2007.

For text:

http://seattletimes.nwsource.com/html/businesstechnology/2003661508_ceohomeindex11.html

For study:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=970413#PaperDownload 

 

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