Scholars Link Success of Firms To Lives of CEOs

The Internet, of course, has made research into homes, marriages and deaths far easier. Thanks to commercial and government databases, this no longer means haunting dusty courthouse record rooms.

Prof. Yermack and Crocker Liu of Arizona State University set out to find real-estate records on the CEOs who were running all of the S&P 500 companies at the end of 2004. They scoured electronic records of taxes and deed transfers. When they couldn't find a home address, they turned to databases on voter registration rolls and campaign contributions. Eventually they found the addresses of 488 of the 500 executives.

The median size of their principal homes was a little over 5,600 square feet. Some were far bigger. A key finding was that stock performance tended to deteriorate after a CEO bought or built an extremely large or costly estate, which they defined as over 10,000 square feet or sited on more than 10 acres. On average, these companies' stocks underperformed the S&P 500 index by about 25 percentage points over the three years after the purchase.

The researchers used aerial photos available on the Internet to find swimming pools, tennis courts, boathouses and other amenities. One such photo, of the home of Limited Brands Inc. CEO Leslie Wexner, clearly showed an equestrian ring.

Mr. Wexner started buying the first part of the 300-plus-acre estate near Columbus, Ohio, in 1987, the researchers say. Limited stock fell slightly in the following three years, while the S&P 500 index rose about 15%. The estate now includes a 22,371-square-foot house, according to county records. A spokeswoman for Limited said the company and Mr. Wexner wouldn't comment.

Government records show Stephen Bollenbach, chief executive of Hilton Hotels Corp., bought a 12,854-square-foot house in the Bel Air section of Los Angeles in January 1997. Over the following three years, the S&P 500 went up more than 75%, but Hilton's stock fell about 70%. The hotel company later rebounded, and recently agreed to be taken private by Blackstone Group. A Hilton spokeswoman declined to comment.

The declines were averages. Some executives who bought mansions saw their stocks rise afterward. The researchers don't claim a direct causal link between a home purchase and a company's stock. "It's whatever is driving the CEO to want to live in a mansion, which to a certain extent is very hard to observe," says Prof. Yermack. The purchase might signal that the executive is entrenched in his position, he says, or may prefer leisure to work.

Another speculation: In a few cases, costly real-estate purchases might provide cover that enables CEOs who are dubious about their companies' prospects to sell a lot of stock without arousing suspicion.

To Frederick E. "Shad" Rowe Jr., a money manager and head of an activist-investor group called the Investors for Director Accountability Foundation, the real-estate study "makes perfect sense." A CEO buys a huge house, "then he needs to hire a decorator, then a landscape architect," Mr. Rowe says. "You spend a lot of time and energy that you could be spending running the company."

Prof. Yermack says he has received numerous requests from investors for copies of the paper, titled "Where are the Shareholders' Mansions?"

He and Prof. Liu say it would be easy to build a simple trading strategy to profit from the edifice complex. One could track CEOs' house purchases through public records, bet against the stocks of companies whose chiefs bought or built megamansions, and buy the stocks of firms whose executives have more modest housing tastes. The professors calculated that doing that would have outperformed the market by about 15 percentage points a year.

In contrast to real estate, studying the effects of family deaths on performance might seem unusually intrusive. Three professors who did so were trying to figure out how much chief executives matter to their companies' performance, versus the many other factors. "The idea of this was to find a random event that hits a CEO and evaluate the performance of the firm before and after this shock," says co-author Daniel Wolfenzon, an associate finance professor at New York University's Stern School of Business. "You have exactly the same CEO and the same firm. The only difference is that there is a shock."

Denmark's government collects large amounts of personal information on citizens, from job status to death records. It also requires every company, even private ones, to make some financial data public. After years of lobbying, the researchers gained access to Danish data, and identified CEOs who had faced a death in the family. They wondered if grief or distraction might have affected companies' subsequent profitability.

The greatest change followed a death of a CEO's child. On average, profitability, as measured by operating return on assets, was roughly 21% lower in the two years after such an event than in the two years before it. The drop was sharper when the child was under 18, and greater still if it was the death of an only child.

Gerald M. Levin was chief executive of Time Warner Inc. in 1997 when his grown son was murdered. "Of course I went into a tailspin," he said. "I made...I won't call it a mistake. I returned to what for me was a narcotic, I returned to work. I worked 25 hours a day." He said he couldn't judge whether his performance was affected but notes that he felt drained of emotion, as though "nothing that happened could affect me anymore." Mr. Levin's grief didn't correlate with a drop in Time Warner's stock price, which greatly outperformed the broader market during the three years after his son's murder.

Asked about the study by Prof. Wolfenzon, who did it with Morten Bennedsen of Copenhagen Business School and Francisco Pérez-González of the University of Texas, Mr. Levin said it "sounds sensible," but "I'm still skeptical, because there are so many other factors."

Mr. Levin said there is immense pressure on executives to hide personal problems, a situation he feels should change. He now helps run a holistic wellness center in California focusing on helping people recover from traumas and other upheavals. Although he isn't sure that grief would distract a top executive from his work, he said, "not enough attention is being paid to the personal situation of a CEO. These are individuals....It's important to understand they're not automatons."

In the study, a CEO's parent's death also was followed by a decline in the company's return on assets, though a smaller drop than after the death of a spouse or child. Overall, the profitability drops were sharper at companies headed by female CEOs. The researchers say they're not clear why.

Only a mother-in-law's death was correlated with an upturn, and it was too small to be statistically significant. Prof. Wolfenzon says they included the mother-in-law as a rationality check.

"It's a little bit funny that the mother-in-law dying doesn't distract the CEO," he said -- hastening to add that his own mother-in-law is vitally important to his productivity: "As we speak, she's taking care of my kids."

It isn't clear how applicable the study is to big public companies in the U.S. or elsewhere, the authors acknowledge. Most of those studied were small, family-controlled ones where a shock to the CEO might have more impact, though Prof. Wolfenzon said the effects appeared similar across all sizes of Danish companies.

Could investors take advantage of the study's conclusions by watching death registries, or even spying on hospital admissions? Prof. Wolfenzon says such information is much tougher to find in most countries than in Denmark. But, he muses, "because the data is so difficult to get, it may not be factored into prices. That makes it a more attractive investment strategy."

Page 1 | Page 2