Heard off the Street: For firms, it’s location, location, location

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David Yermack's analysis of corporate behavior and its influence on stock prices has produced some entertaining observations.

The New York University finance professor's 2004 study concluded companies that permitted their CEOs to use the corporate jet for personal travel underperformed the market by more than 4 percent annually.

Three years later, Mr. Yermack and a colleague discovered that companies whose CEOs acquired extremely large homes tended to underperform the market. They also discovered that the stocks of companies whose CEOs did not have to sell shares to finance their mansions performed significantly better than companies where the CEO's home was financed with stock sales.

Now Mr. Yermack and one of his former students, Temple University finance professor Yuanzhi Li, have discovered a relationship between where companies hold shareholder meetings and how well their stock subsequently performs.

“We find a systematic pattern of poor company performance in the aftermath of annual meetings that are moved a great distance away from headquarters,” they write in their study.

They also compared where shareholder meetings were held with earnings announcements that companies made in the six months after the meetings and discovered that the farther away from headquarters the meeting was, the more disappointing earnings were. Earnings were significantly worse for companies that usually met in their hometown but then decided to go on the road for that year.

“The result is very strong,” said Ms. Li, who earned her Ph.D. at NYU, where Mr. Yermack was her adviser.

Special shareholder meetings — those called for the purpose of voting on a particular measure rather than for the usual reasons of electing directors and approving the auditor — held far away from home resulted in particularly dismal stock performance. Stocks of companies that held special meetings 1,000 miles from headquarters did 16.5 percent worse than the overall market in the next six months, according to the study.

Mr. Yermack and Ms. Li have an interesting explanation for the phenomenon. Management knows bad news is coming and “may move [meetings] far from headquarters as part of a scheme to suppress negative news for as long as possible,” they conclude.

Shareholders and investment analysts in a company's hometown, as well as the hometown media, may be the most knowledgeable people about the company, according to the researchers. Moving the meeting far away discourages them from attending, reducing the chances of them asking questions that could force the bad news out sooner than the company wants it divulged, they say.

Larger companies are more likely to hold meetings out of town, Mr. Yermack said, and they generally “have more concern about managing the flow of news.”

The fact that companies, including those with bad news in the works, have to schedule shareholder meetings months in advance “does suggest the private information they have has a long lead time to it,” Mr. Yermack said in an interview.

The research was inspired by a conversation Mr. Yermack had with Ekkehard Wenger, a German university professor and shareholder activist. Mr. Wenger told Mr. Yermack he could reliably predict the performance of a company's stock by how evasive managers behaved during shareholder meetings.

While Mr. Wenger measured evasiveness by such things as whether management cut investors off, refused to recognize them or failed to answer their questions completely, Mr. Yermack and Ms. Li measured evasiveness based on where companies held their shareholder meetings.

He and Ms. Li looked at nearly 10,000 annual and special shareholder meetings held between 2006 and 2010. One of the things they looked at was shareholder tourism: Which states do best attracting shareholder meetings? Pennsylvania fared pretty well: Over the five-year period, there were 29 more meetings held in Pennsylvania by out-of-state companies than meetings held out of state by Pennsylvania companies. California and Washington, D.C., did the best while Ohio and Nevada did the worst.

“It is not obvious why so many companies headquartered in Nevada or Ohio choose to avoid meeting there,” the researchers wrote.

Mr. Yermack said companies expecting problems at a shareholder meeting are more likely to hold it in their hometown, where they can better handle security arrangements and bring in loyal employees to increase the odds in their favor.

“It's an opportunity to not only do some crowd control, but pack the hall with supporters. That may not be as easy to do if you're in a remote location,” he said.

While it might be tempting for investors to adjust their portfolios based on where a few companies hold shareholder meetings (Allegheny Technologies, Mylan and PNC Financial Services are among the Pittsburgh companies going out of town this spring), Ms. Li said that is not a good idea.

Using a small sample won't produce results as representative as what they uncovered after analyzing nearly 10,000 meetings held by more than 2,300 companies over a five-year period, she cautioned.

Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.

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