Beware the power of bricks and mortar

Apr 16 2007 by Brian Amble Print This Article

When a company CEO supersizes his own home, it may be time to dump its stock.

So suggest finance Professors Crocker Liu of Arizona State University and David Yermack of New York University, whose unique piece of number-crunching has found that for CEOs whose homes were larger than 10,000 square feet or sitting on 10 acres or more of land, their companies' stock price fell an average of 1.7 per cent in the year following their home purchase.

"We also find that, regardless of the source of finance, future company performance deteriorates when CEOs acquire extremely large or costly mansions and estates. We therefore interpret large home acquisitions as signals of CEO entrenchment," they argue.

Liu and Yermack's paper, Where are the shareholders' mansions?, also found that when a CEO lived in more normal-sized houses, the company had an average stock-price increase of about 6 per cent.

Mind you, by 'normal' they mean something in the region of 5,700 square feet with 4.5 bathrooms and worth $2.7m - a modest property, in other words...

So why the correlation? One reason is that a supersized home could suggest entrenchment Ė the CEO feels (rather too) secure in his position and isn't concerned he is going to have to leave any time soon.

Alternatively, it could also mean that the CEO suspects things might be going wrong and has sold shares or options just before they are going to peak in order to pay for their new palace.

Older Comments

This is an interesting tidbit.

Your insights on why poorer performing CEOs may have larger homes seems plausible to me.

I also wonder if the correlation between home size and company performance may not be due to:

1. The weak correlation between pay and performance in many large firms with deep pockets; and 2. When pay escalates to stratospheric levels, at what point does the CEO become more concerned about preserving his own wealth vs. that of the enterprise he or she is leading?

robert edward cenek, RODP Uncommon Commentary on the World of Work

robert edward cenek, RODP Dillon, Montana