4/08/2007

The bigger his house, the worse the CEO

In a recent research paper, two finance professors (David Yermack of New York University and Crocker Liu of Arizona State ) identified the primary residences of 488 CEOs of the (US) S&P 500 Companies, and demonstrated that there is a relationship between CEO home-buying behavior and their company's stock performance.

The mean residence of a CEO was 6,145 square feet, 12 rooms, 5.37 acres of land, and a market value of $3.1 million. In 2005, the stocks of companies whose CEOs lived in larger homes (i.e., above the average for all CEOs) returned, on average, 3.35% less than companies whose CEOs lived in below-average homes. And the CEOs who lived in the biggest homes (at least 10,000 square feet or over 10 acres) underperformed their peers who inhabited more modest homes by 6.9%, on average.

Two professors also looked at stock returns for 164 companies whose CEOs bought new homes after becoming CEO. They found a significantly negative stock performance following the acquisition of very large homes by company CEOs on the order of 1.25% performance lag per month.

The explanation for the relationship may be complex, but soon, somebody could use this information when deciding which stock to own.

In retrospect, may be we all should sell Microsoft significantly underperforming stock in 2000, when we knew Bill Gates moved into his gargantuan home in the late 1990s.

4 comments:

WDM Mommy said...

Love your blog! and the numbers :)

Jenny said...

I absolutely love your site! I went through and read all of your old posts. Keep up the good work.

Anonymous said...

This is interesting! Wonder if any of the big stockholders of these companies are taking note.

Jenny said...

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