CEO homes could signal lagging stocks

first_imgCEOs often buy new homes the year they get the “big” job, with a total of 164 S&P 500 executives doing so in this survey. To finance their purchases, the study’s authors found, 44percent used mortgages, almost evenly split between adjustable-rate and fixed-rate loans. Shares peak More interesting is that about 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. That doesn’t mean that they necessarily sold those shares and then used the proceeds to buy their homes. The authors felt the timing of those equity moves was more than just coincidence, however, because the companies’ share prices began to fall after that peak. “The stock charts show that some CEOs might be very motivated sellers who are rolling money into a home,” Yermack said. “Home purchases could be a ruse. If you are going to dump stock, you can buy a house to cover your tracks.” Those living really large are the 12percent of S&P 500 CEOs with homes topping 10,000 square feet, or on a minimum of 10 acres. But occupying the biggest house on the block doesn’t make one a winner on Wall Street. The mega-mansion owners’ company stocks lagged the S&P 500 by about 25percent over the three years after their home purchases. In contrast, those buying more modestly saw their companies’ stocks beat the market benchmark by about the same amount. Former Home Depot Inc. CEO Robert Nardelli’s nearly 30,000-square-foot mansion was among the largest in the study. It was purchased after Nardelli took over the home improvement chain, according to Yermack. But that kind of space didn’t give him enough room to come up with a strategy for Home Depot that investors necessarily liked. The company’s shares fell more than 3percent on a split-adjusted basis from Nardelli’s arrival in December 2000 to when he resigned at the start of this year under a cloud over his outsized pay. Malibu slide Power-One Inc.’s former CEO and now chairman Steven Goldman was among the worst-performing big homeowners in the study. He bought a 12,000 square-foot home in Malibu in 2000 for $15million, according to Zillow.com. He sold more than 3million shares in the 12 months before that purchase for a total market value of more than $100million, according to Thomson Financial. The year the house was bought also happens to be the year that the power products manufacturer’s stock hit its all-time peak of nearly of $90 a share on a closing basis. But its shares have faced a steep slide since and now trade around $5.50 each. Of course, not everyone owning big homes is destined to disappoint their company’s stock investors. Yermack notes there are plenty with trophy properties that have done right by their shareholders, including Oracle Corp.’s leader Larry Ellison and Sun Microsystems Inc. former CEO and current chairman Scott McNealy. Still, it’s worth keeping tabs on CEOs’ home-buying tactics. Bigger certainly isn’t always better for investors. 160Want local news?Sign up for the Localist and stay informed Something went wrong. Please try again.subscribeCongratulations! You’re all set! NEW YORK – Investors looking for stock-picking tips might find the answer right at home – not at their own homes, 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’s 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-size 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. $2.7 million homes 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, titled “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 $2.7million – 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 8.5percent are next to or on the grounds of golf courses. The median CEO lives 12.5miles away from corporate headquarters, though 6percent of those in the study lived more than 250miles or more away – meaning those CEOs take a plane ride to get to the office. last_img read more

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