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2012 | OriginalPaper | Chapter

Where Are the Shareholders’ Mansions? CEOs’ Home Purchases, Stock Sales, and Subsequent Company Performance

Authors : Crocker Liu, David Yermack

Published in: Corporate Governance

Publisher: Springer Berlin Heidelberg

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Abstract

We study real estate purchases by major company CEOs, compiling a database of the principal residences of nearly every top executive in the Standard and Poor’s 500 index. When a CEO buys real estate, future company performance is inversely related to the CEO’s liquidation of company shares and options for financing the transaction. 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. Our research also provides useful insights for calibrating utility based models of executive compensation and for understanding patterns of Veblenian conspicuous consumption.

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next chapter Does One Size Fit All? A Study of the Simultaneous Relations Among Ownership, Corporate Governance Mechanisms, and the Financial Performance of Firms in China

According to www.phrases.org.uk, the classical phrasing is “An Englishman’s home is his castle,” and the earliest known references to the proverb date from 1581.

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The Gates, Mittal, and Buffett residences are described in “Homes of the billionaires,” Forbes, March 10, 2005.

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Table 1 does not reflect data for the $140 million, 66,000 square foot Bill Gates property described at the beginning of the article. Gates had surrendered his CEO position at Microsoft prior to the effective date of the sample, so the company is represented in our data by current CEO Steve Ballmer, who lives in a more modest 4,100 square foot home with a value of about $8 million in Hunts Point, WA. Ballmer is a neighbor of the CEO of Costco Wholesale, who lives on the same street one-quarter mile away in a slightly larger and more valuable home.

Well known examples of long distance CEOs include Craig Barrett, who lived in the Phoenix, AZ area for many years while serving as CEO of Intel Corp. (Santa Clara, CA), and Gerald Grinstein, a longtime resident of Washington State who has continued to keep his home there while serving as CEO of Delta Air Lines (Atlanta, GA). In each of these cases the CEO appears to have owned no property near headquarters and appears to have lived in company-subsidized housing. Recent proxy disclosures for these two firms report perquisite compensation related to “apartment near corporate headquarters” (Barrett) and “relocation expenses” (Grinstein).

In a handful cases we identify companies that list the nominal mailing address of headquarters at one location but have the actual head office elsewhere; Tyco International, for example, is officially domiciled in Bermuda but has its de facto headquarters in West Windsor, NJ, and Federated Department Stores lists its address in Cincinnati, OH, while its headquarters office is actually in New York City. In these cases we use the de facto location to measure the CEO’s commuting distance.

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These acquisitions included such well-known deals as Hilton Hotels’ failed attempt to acquire ITT Corp., and Sprint Corp.’s successful merger with Nextel.

We see this in a variety of tests. For example, the mean cumulative abnormal returns over the 252 trading days (1 year) prior to home purchases are +1 % for CEOs buying very large homes and +6 % for all other CEOs, with the difference not significant.

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Title: Where Are the Shareholders’ Mansions? CEOs’ Home Purchases, Stock Sales, and Subsequent Company Performance
Authors: Crocker Liu
David Yermack
Publisher: Springer Berlin Heidelberg
Book: Corporate Governance
Print ISBN: 978-3-642-31578-7

Electronic ISBN: 978-3-642-31579-4

Copyright Year: 2012
DOI: https://doi.org/10.1007/978-3-642-31579-4_1