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

Abstract

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 & 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.Keywords: residential real estate, insider trading, CEO entrenchment, conspicuous consumption.For helpful comments we wish to thank J. Carr Bettis, Stuart Gillan, William Rabel, and seminar participants at the University of Alabama, Boston College, Center for Financial Studies (Frankfurt), Erasmus University (Rotterdam), European School of Management and Technology (Berlin), Federal Reserve Bank of New York, University of Georgia, London Business School Corporate Governance Conference, University of Lugano, Mannheim University, New Economic School (Moscow), Texas Tech University, and Tilburg University. We appreciate research assistance by Michael Gershman and Michael Mahoney. For the paper's title, we acknowledge Fred Schwed Jr., Where Are the Customers' Yachts? Or, A Good Hard Look at Wall Street (1940). 1Where are the shareholders' mansions? CEOs' home purchases, stock sales, and subsequent company performance IntroductionPurchasing a home represents a significant economic decision, involving aspects of both investment and consumption. The buyer generally adjusts his portfolio, often taking on secured debt and liquidating assets to pay the acquisition cost. Thereafter, the homeowner enjoys benefits related to the size, comfort, and location of the property. Affluent persons sometimes acquire impressive homes as signals of their personal wealth, power and importance, an age-old behavior labeled "conspicuous consumption" by sociologist Thorstein Veblen.We study real estate purchases by prominent American CEOs, compiling a database of the principal residences of nearly every top executive in the Standard & Poor's 500 index of major U.S. companies. We test whether CEOs' decisions about the size, cost, and financing of their homes contain information useful for forecasting future performance of their companies, and we find patterns with strong statistical and economic significance. When a CEO buys a home, future company performance is inversely related to the CEO's liquidation of company shares and options as a source of financing for the transaction, even though these stock sales are often small relative to the CEO's total holdings in his firm. We also find that, regardless of the source of finance, future company performance deteriorates when CEOs acquire extremely larg...

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