Biotech Values

[DewDiligence]

When the CEO buys a mansion, sell the stock!

http://online.wsj.com/article/SB117634165304767198.html

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By JUDITH BURNS
April 12, 2007

WASHINGTON -- When the boss buys a trophy home, investors would do well to sell shares in the company, according to a new study of stock performance of Standard & Poor's 500-stock index firms following home purchases by chief executives.

Call it the mansion effect: The bigger the CEO's home is, the worse the company's stock fares, the study by Arizona State University finance Professor Crocker Liu and New York University finance Professor David Yermack found.

Investors who short shares of companies after the CEO has moved into a palatial home would reap returns of 29% after one year, and 46% after two years, the study estimates. The authors calculated hypothetical gains based on short sales, a trading strategy in which shares are borrowed and sold in hopes of replacing borrowed shares later at a lower price.

…The study covers 488 homes of executives at S&P 500 firms in 2004 and those firms' stock-market performance in 2005. For CEOs with multiple homes, the authors focused on residences close to work.
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