Friday, April 16, 2004

Living High on the Hog

Alex Tabarrok has a post up at Marginal Revolution, linking to a paper that suggests that shareholders ought to beware of high-living CEOs, and not just because their lavish lifestyles are directly impacting the bottom line.

Abstract: This paper studies perquisites of major company CEOs, focusing on personal use of company planes. For firms that have disclosed this managerial benefit, average shareholder returns under-perform market benchmarks by more than 4 percent annually, a severe gap far exceeding the costs of resources consumed. Around the date of the initial disclosure, firms' stock prices drop by an average of 2 percent. Regression analysis finds negative associations between CEOs' personal aircraft use and their compensation and percentage ownership, in accord with Jensen-Meckling (1976) and Fama (1980), but both relations have small magnitude. (emphasis added)

The results of this paper make perfect sense if one considers executive usage of corporate jets as a proxy for undesirable personality characteristics, like an excessive concern for prestige and the limelight, which often leads CEOs to indulge in mergers, takeovers and other transactions that make no sense from an economic standpoint, but do manage to command the front pages of the big newspapers and corporate porn rags like Fortune magazine. Flamboyant, high-profile CEOs are one manifestation of the excessive insulation from market forces enjoyed by management, thanks mostly to efforts by misguided legislators to "save jobs" from the ogres called corporate raiders.