The last two bubbles—the dot-com bubble of the 1990s and the real-estate bubble of this decade—have combined to create a new culture of real-estate voyeurism. Thanks to Internet-based services and the digitization of public records, real-estate obsessives can check out how much friends and neighbors paid for their homes (domania.com), how much said homes might be worth (Zillow), and what those homes look like from above (Google Earth).
These developments have been a boon to real-estate agents, would-be flippers, celebrity trackers, and all-around busybodies. Now, thanks to two finance professors who have examined the extreme home-buying habits of some of America's wealthiest individuals, they could be a boon to stock pickers, too. Robin Leach, meet Peter Lynch.
In a working paper titled "Where are the Shareholders' Mansions?" David Yermack of New York University and Crocker Liu of Arizona State wonder whether there is a relationship between CEO home-buying behavior and stock performance. (The title is a riff on the classic 1940 investment book Where Are the Customers' Yachts?.) In doing so, the two academics are invading one of the last preserves of executive privacy, and we should all be very grateful! Thanks to Securities and Exchange Commission filings, the public can learn a great detail about the salaries, benefits, and perks that CEOs receive. But up until now, homes have generally been off-limits. For security reasons and to ward off jealousy from bitter shareholders, angry underlings, and discarded first wives, CEOs like to keep their homes well-hidden behind security gates and tall hedges. (About 18 months ago, I interviewed a famous private-equity magnate. There were two ironclad ground rules. First, the conversation would be on background. Second, I could not describe the grounds, the furnishings, or the mind-boggling size of his house.)
Yermack and Liu insist there's a solid academic reason to look through the keyholes. They want to figure out if a mansion purchase signals commitment or cashing out. A CEO who buys a 12,000-square-foot mansion could be showing his intent to stay for the long haul and to bust his butt so that he'll have the cash to pay off the huge mortgage. In which case, you'd expect stocks of the companies where the CEO just bought an obscenely large house to thrive. Buy!
Or the purchase of an absurdly large house could signal entrenchment: The CEO is too comfortable with his position and his personal finances. He has made so much money that he can't really be bothered with running the company. And the willingness to spend gazillions on a house—not to mention the furnishings, artwork, and baubles to fill it—betokens a general inattentiveness to costs. In which case, you'd expect stocks of the companies where the CEO just bought an obscenely large house to fare poorly. Sell!
Intuitively, the entrenchment argument makes sense. Just look at this very long-term chart of Microsoft. You'll see that since the late 1990s, when Bill Gates moved into his gargantuan home, the stock has essentially moved sideways, significantly underperforming the market.