Sunday, April 15, 2007

When Boss Lives Large - time to sell stock

I was on vacation this week and catching up on reading some non-medical journal news. I came across one piece in the Wall Street Journal that I wanted to share. It ties into EverytingHealth because losing hard earned money is usually not good for one's mental health.

It seems that when a CEO of a publicly traded company buys a trophy home, investors should use that as a clue to sell their stock. It is called the "mansion effect": the bigger the CEO's home, the worse the company stock performs. Researchers from Arizona State University (my alma mater) estimate that if investors sold the stock when the CEO moves into a palatial home, they would reap returns of 29% after one year, and 46% after two years.

Top Executives who pay for their trophy homes by selling company stock also underperformed compared to market benchmarks. The reason can't be related to the number of shares sold since those numbers are small compared to the total number of shares. The researchers speculate that top executives may have become "entitled" , lazy and entrenched in the company. Perhaps these CEOs demoralize other executives and employees and affect overall corporate performance.

Whatever is going on, it is a fascinating study that covered 488 primary residence homes of executives at S&P 500 firms. Some of these homes featured tennis courts, boat houses, formal gardens, detached guest houses and servants' quarters. One spread had a private polo field and equestrian ring. About 12% were waterfront properties and 8.5% were on golf courses.

I've never seen an annual report that mentions the top exec's personal properties. If anyone knows how to find out this information, let me know.


Anonymous said...

Not only that, it's also time to sell a stock when a company buys the naming rights of a stadium. Remember when Candlestick Park became 3Com Park? A share of 3Com stock was $50 when they paid the City of San Francisco tens of millions of dollars to put their name on the famous stadium. Today a cup of coffee at Starbux costs more than a share of 3Com stock.

Toni Brayer MD said...

Now that is good info we can "take to the bank". Thanks, KW

Rich said...

Thanks for sharing this info. It's all about greed - bottom line.

Good point on the renaming thing KW. I hate when old fashion Ball parks are renamed to company or product names. Greed is touching every part of lives these days wether we want it to or not, it's shoved in our faces. said...

Thank you for this post, really worthwhile data.

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