The Wall Street Journal [subscription required] details some fascinating research on how activities in a CEO's private life affect his or her company's profitability or stock price. The most useful idea here is that investors can use Google Inc.'s (NASDAQ: GOOG) Google Earth to spot short selling opportunities.
One aspect of this research that did not surprise me was that if the CEO builds a huge home -- greater than 10,000 square feet -- the company's stock price declines. I have long noticed that when a company builds a huge new corporate headquarters building or names a sports stadium after itself, trouble often follows for investors in its stock. The reason for this link? The CEO is more focused on personal glorification than on expanding profits.
But what I found surprising and intrusive was that deaths in a CEO's family influence company profitability, according to a study by Danish researchers of 75,000 companies there. Here's the post-event change in return on assets of various deaths in a CEO's family:
- Mother-in-law +7%
- Parent -7.7%
- Any family member -9.4%
- Spouse -14.7%
- Child -21.4%
I can't offer an explanation of why a mother-in-law's death would boost profitability.
But I can understand why the death of a child would take a CEO's eye off the ball. One case study is Gerald M. Levin who was chief executive of BloggingStocks' parent, Time Warner Inc. (NYSE: TWX) in 1997 when his grown son was murdered. "Of course I went into a tailspin," he told The Journal. "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."
Levin's account provides insight into how a child's death affects a CEO personally. However, it does not help explain the change in Time Warner's performance -- its stock price greatly outperformed the broader market during the three years after his son's murder. Nevertheless, it is not surprising that not all CEOs reacted to a child's death by working harder.
Possibly the most interesting and useful finding in the article was that when a CEO bought or built an extremely large or costly estate, which researchers 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 -- such as those on Google Earth -- to find swimming pools, tennis courts, boathouses and other amenities. One such photo, of the home of Limited Brands Inc. (NYSE: LTD) CEO Leslie Wexner, clearly showed an equestrian ring.
Wexner started buying the first part of the 300-plus-acre estate near Columbus, OH, in 1987. 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.
So if you want to find opportunities to make money by selling short, start scanning Google Earth for public company CEOs' homes. If you see mansions with all the trimmings, you may have yourself a good short sale candidate.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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