Saturday, March 31, 2007

Big mansions, small profits

Slate had an article a couple of days ago that reported on the findings of a new study.

Haunted Mansion

A study proves that the bigger his house, the worse the CEO.

The article links to the study in question: Where are the Shareholders' Mansions? CEOs' Home Purchases, Stock Sales, and Subsequent Company Performance

It's an interesting study, with some pretty clear results.

We study real estate purchases of major company CEOs, compiling a database of the principal residences of nearly every top executive in the Standard & Poor’s 500 index of major U.S. companies. We test whether CEOs’ decisions about the size, cost, and financing of their homes contains information useful for forecasting future performance their companies, and we find patterns with strong statistical and economic significance. When a CEO buys a home, future company performance is inversely related to the CEO’s liquidation of company shares and options as a source of financing for the transaction, even though these stock sales are often small
relative to the CEO’s total holdings in his firm. We also find that, regardless of the source of finance, future company performance deteriorates when CEOs acquire extremely large or costly mansions and estates.

The authors behind the study argues that their findings are consistent with CEO entrenchmen - i.e. the CEOs feel secure in their positions when they acquire the mansions.

So, if you are out investing, it could be relevant to take the CEOs housing into consideration.



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