The next time you're researching a company's performance, don't forget to check out the CEO's crib. If the top dog has recently made a very large home purchase, you might want to think twice before buying the common stock.
At least those are the findings of two finance professors, Crocker Liu of Arizona State University and David Yermack of New York University. Their study, sponsored by Standard & Poor's, is based on the home-buying habits of CEOs at 488 of the companies in the S&P 500 index.
The study found that when a company CEO buys a large or costly home, the company's stock performance weakens. Those CEO's who had homes that were more expensive than the sample median price of $2.3 million saw their company shares underperform by an average of 9 percent in 2005. Another bad sign: The CEOs often liquidated company stock or options in the 12 months prior to buying the house.
The graph at left shows cumulative “abnormal” stock returns, calculated as the difference between the unadjusted return and the monthly return on the S&P 500. The results are based on companies in which the CEO acquired his home subsequent to his appointment as CEO.
Of course, the study may be merely more proof, if you needed it, that one can datamine to find correlations for just about anything.