A stock tip from two university professors: If a company's chief executive lives in a home the size of a shopping mall, consider dumping its stock.
That's right, lavish digs for the company's top boss could mean lousy returns for stockholders, say finance Professors Crocker Liu of Arizona State University and David Yermack of New York University.
In a study titled "Where are the shareholders' mansions? CEOs' home purchases, stock sales and subsequent company performance," the two found that for CEOs whose homes were larger than 10,000 square feet or sitting on 10 acres or more, their companies' stock price fell an average of 1.7 percent in the year following their home purchase.
For CEOs with more normal-size homes - for CEOs, that's close to 5,700 square feet - the company had an average stock-price increase of about 6 percent.
The study, released last month, was based on CEOs of 488 of the companies in the Standard & Poor's 500 index.
In an interview Wednesday, Liu cited a few Silicon Valley CEOs and their home-buying and companies' stock performance, although none of the local CEOs' homes were larger than 10,000 square feet or sat on a lot that was at least 10 acres. The examples ranged from dismal to sublime, from a shareholder perspective. Symantec stock fell 32 percent in the 12 months after CEO John Thompson's home purchase in Woodside, Liu said, while Apple's stock rose 123 percent after Steve Jobs bought his home, also in Woodside. Liu didn't provide any further details of those sales.
And if a CEO sells company stock and then buys a house? Beware of that, too.
The authors argue that when a CEO sells shares of his or her company and then buys a home, it's a signal of the leader's "entrenchment" in the company. The study hypothesized that when some CEOs sold shares, then purchased a home, their companies' stock performance was likely to suffer.
But, Liu said, plenty of insider-trading studies show stock sales by CEOs are indicators of future stock declines - regardless of whether a home is purchased. Some CEOs may be using their imminent home purchase as a pretext for selling shares, he said. As he and Yermack noted in their paper, such selling is sometimes discouraged by the board of directors, and "disfavored" by investors.
`Skin in the game'
"The CEOs should put enough skin in the game," Liu said. "If they are putting in their own money and taking a loan like everybody else, their stock tends to be doing OK."
Forty-four percent of CEOs in the study bought homes using a mortgage. About one-third of CEOs sold company stock in the 12 months before buying a home.
Liu and Yermack studied the home purchases and financing methods of those who were company CEOs as of Dec. 31, 2004. Their assumptions about the value of executives' homes were based on valuations on public Web sites Zillow.com and Reply.com in 2006.
In a sign of how secretive some company executives are, it took Liu and Yermack three years to figure out where 488 of the S&P 500 CEOs lived.
In compiling their property database, the professors culled some little-known tidbits about the homes of the country's top bosses, such as:
Median number of bathrooms in a CEO home: 4.5
Median square feet: 5,664
Median value, 2006: $2.7 million
Median distance a CEO lives from the office: 12.5 miles
Percentage of CEOs who live on a golf course: 8.5
Liu and Yermack are in the process of doing further research on the relationships between executives' real estate holdings and their companies' performance on Wall Street. Next up: chief executives' vacation playgrounds.
"Some of these CEOs, their vacation homes are even more expensive than their primary residences," Liu said.
Download the full report at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=970413#PaperDownload