Sell Short When the C.E.O. Goes House-Hunting

How do you know when it’s the right time to sell shares in a company? A new report suggests that in addition to looking at price/earnings ratios and market trends, you should keep a sharp eye on the C.E.O.: If he or she buys a trophy house, call your broker immediately.

A study sponsored by Standard & Poor’s found that if you short shares in a company when the C.E.O. buys a palatial residence, you would see a return of 29 percent after one year, and 46 percent after two years.

The authors of the study, New York University finance professor David Yermack and Arizona State University finance professor Crocker Liu, found a further correlation: When executives paid for their trophy home by selling company stock or cashing in stock options—which was the case among 27 percent of the C.E.O.’s studied—the shares of that company under-performed the market for several years.

Why do splashy home purchases spell bad news for a company’s public value? One speculation is that C.E.O.’s who drop big bucks on a showy apartment or house tend to have an overly developed sense of entitlement, with king-like personalities that drag down the morale of their employees, resulting in lackluster corporate performance. And in several cases, the study suggests, insider trading may be the culprit: C.E.O.’s who get wind of a yet-to-be-disclosed lousy earnings report may want to dump their shares, and use the purchase of a house as a pretext for doing so.

Overall, you’ll be happy to know, chief executives are doing pretty well. The study found that the median home price for a C.E.O. was $2.745 million—10 times higher than the national average—and that the homes are typically over 5,600 square feet, with 11 rooms and four and a half bathrooms. Twelve percent are on the water; 8.5 percent are close enough to a golf course to walk to the first tee.

Sell Short When the C.E.O. Goes House-Hunting