The Bigger The CEO’s House, The Smaller The Shareholder’s Returns
July 10, 2007
A new study on executive stock sales and ensuing stock performance, summarized on Marc Andreessen’s blog, has discovered that the more house an executive buys with the proceeds of selling company stock, the crummier the future company stock returns:
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 look first at whether the CEO sells shares of company stock to finance the home purchase. Although buying a house appears to offer a prima facie personal liquidity reason for CEOs to sell their own shares, most are wealthy enough to acquire homes with other sources of finance."
This should be expected. If a top exec already owns stock in their company, it’s not illegal to hang on if they know next year’s earnings are looking pretty good. Therefore, why would a rational executive cash out of a near-sure thing to buy a historically ho-hum investment with high maintenance costs?
A new study on executive stock sales and ensuing stock performance, summarized on Marc Andreessen’s blog, has discovered that the more house an executive buys with the proceeds of selling company stock, the crummier the future company stock returns:
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 look first at whether the CEO sells shares of company stock to finance the home purchase. Although buying a house appears to offer a prima facie personal liquidity reason for CEOs to sell their own shares, most are wealthy enough to acquire homes with other sources of finance."
This should be expected. If a top exec already owns stock in their company, it’s not illegal to hang on if they know next year’s earnings are looking pretty good. Therefore, why would a rational executive cash out of a near-sure thing to buy a historically ho-hum investment with high maintenance costs?
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