HR Strange But True!
September 13, 2007

When chief executive officers buy or build an extremely large or costly mansion, the performance of their company deteriorates, according to research conducted by David Yermack of New York University and Crocker Liu of Arizona State University.

For the study, the researchers looked at real estate purchases by top executives in Standard & Poor's 500 index of major U.S. companies, Wall Street Journal reports.

The researchers say that purchasing homes can either indicate the executives' commitment to their firms or indicate entrenchment (that is, they feel quite secure in their positions and have little concern about possible removal by the board of directors).

The researchers concluded that it is probably the latter because after executives purchased large and expensive homes, their companies' stock underperformed the market, the newspaper notes.

"Our analysis supports the entrenchment hypothesis, as we observe an inverse association between the value and size of a CEO's residence and the returns on his company's stock," the researchers write.

However, when CEOs who don't sell their company's shares to purchase or build a home perform, the company's stock performs significantly better than the stocks of companies where the CEO did sell company stock to purchase the large home, the researchers found.

The researchers' definition of a large or costly home is one that is more than 10,000 square feet or sits on more than 10 acres.

As the Wall Street Journal reports, other researchers have found unusual links between a CEO's personal life and their company's success. Some researchers, for example, have found that a company's performance declines after a CEO's spouse or child dies. However, if the CEO's mother-in-law dies, the company's performance actually improves.

Sources: Wall Street Journal and "Where are the Shareholders' Mansions?"

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