Saturday, April 21, 2007

Sunday dollars+sense: beware the mansion.

Want to know if a company you own shares in is about to tank? A few years back a visiting American gave a tip to a Securities Institute conference in Sydney. He said: "Beware the stadium". As soon as a company names a stadium after itself, it tanks.

They audience tittered nervously, and he didn’t know why. Telstra had just spent $70 million naming both the Telstra Dome and the Telstra Stadium.

(As it happens, Telstra’s share price did tank.)

Now, thanks to another two American professors of finance we know that it’s not just stadiums - its also CEOs mansions.

Actually, this shouldn’t come as a surprise to Australians who remember Brian Quinn. Ten years ago the once mighty Coles Myer Chief Executive and Reserve Bank board member was sentenced to jail for conspiring to defraud his firm of almost $4.5 million which he used to extend his home.

It is not so much the fraud that would worry the professors; it’s the extent of the renovations...

Covering the equivalent of five suburban blocks, Brian and his wife’s house ended up with 4 bathrooms, a family room, a billiard room and a eight-car garage, a tennis court, cricket pitch, swimming pool and spa house, and grand entrance with chandeliers.

Actually it was modest by the standards of the homes that Crocker Liu and David Yermack have documented. They’ve managed to discover the acreage, floor area, number of rooms and value of the homes of 488 of the nation’s top 500 Chief Executives.

It wasn’t easy. Many were in their partners’ names or owned by trusts. The professors used Google Maps and land titles records. The typical top American CEO lives in a house with 11 rooms plus 4 - 5 bathrooms covering more than 500 square metres.

They found that the bigger the home a CEO bought while in the job, the worse his company’s subsequent performance.

So reliable was this guide that they constructed two share portfolios. One only owned shares in companies whose CEOs lived in houses bigger than 1,000 square metres or on more than 4 hectares of land. The other only owned shares in companies whose CEOs had smaller homes.

After 3 years the ‘smaller’ portfolio outperformed the ‘larger’ portfolio by 46 per cent.

Perhaps we should head down to our own land tiles offices and get busy with our local version of Google Maps.

Liu, Crocker H. and Yermack, David, Where are the Shareholders' Mansions? CEOs' Home Purchases, Stock Sales, and Subsequent Company Performance (March 2007)