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 that 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. They also found that companies with CEOs living in more modest abodes often see their shares outperform.
Arizona State University’s Crocker Liu and New York University’s David Yermack, who teach finance at their respective schools, contend that a super-sized home purchase shows entrenchment. A CEO might feel secure in his position, and therefore isn’t concerned that 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 professors concluded that the purchase of a mega-mansion 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.
Privileged Class
Liu and Crocker culled data on 488 principal residences from CEOs of companies in the Standard & Poor’s 500 stock index at the end of 2004 for their study, entitled “Where Are the Shareholders’ Mansions?” The 12 CEOs not included may be renters who own no property or live outside the United States. The researchers’ sources of information included property deeds, tax records, online databases such as Zillow.com and Reply.com, Google searches, employment contracts and voter registration data.
Their findings certainly 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 one and a quarter acre.
Twelve percent of CEOs’ homes are situated 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.
CEOs often buy new homes the year they get the “big” job, with a total of 164 S&P 500 executives doing that in this survey. To finance their purchases, the authors found that 44 percent used mortgages, almost evenly split between adjustable-rate and fixed-rate loans.
More interesting is that around a third of CEOs appear to have exercised stock options and sold shares in the 12 months before they made a home purchase. The shares peaked right before the home was bought.
