Exploring connections between CEOs’ absences from the headquarters and the flow of corporate news, the author finds that the number of companies’ news announcements is significantly lower when CEOs are away from headquarters. Companies tend to disclose favorable news just before CEOs leave for vacation. The stock price volatility remains low during CEOs’ absences from the office and then increases when the CEOs return to work. There is also an abnormal positive return a few days before and after CEOs return from vacation.
What’s Inside?
The author finds that the companies in the sample coordinate public news disclosures with their CEOs’ travel plans. Companies typically make major news announcements before the CEOs’ vacations and withhold significant news until the CEOs return. He also finds that CEOs spend fewer days at their vacation homes when their ownership in the company is high and when the weather is bad at their vacation homes’ locations.
How Is This Research Useful to Practitioners?
The author finds that by observing the movement of the corporate jet to and from the airport near CEOs’ vacation homes, investors can gather valuable information about the flow of corporate news. The results suggest that market participants can use derivatives to bet on a decrease in volatility of the stock price during CEOs’ vacations. There is significant excess return a few days prior to CEOs leaving the office and a few days after they return to work. It will be difficult for investors to act before CEOs’ vacations begin (because this information is not publicly available), but the strategy can certainly be implemented after their return to work.
How Did the Author Conduct This Research?
The author searched the WSJ Jet Tracker database for all companies in the S&P 500 Index during 2007–2010. He identified the airports near the headquarters and then researched whether the corporate jet flies to an airport serving a leisure destination. He searched the online real estate records on LexisNexis to determine whether the company’s CEO owns a property near that airport. The author was able to identify vacation homes for about one-third of the CEOs. He then studied every flight to and from that vacation airport and assumed that the CEO was the passenger on the jet. With these methods, the author was able to identify vacation schedules for 66 CEOs from 65 companies. He identified a sample of 230 vacations lasting five weekdays or longer during 2007–2010.
On average, CEOs spent 17 workdays at their vacation homes. The author uses a probit model to test factors associated with each CEO’s decision to take a vacation. He finds that CEOs spent less time away from office if they had more personal wealth tied to performance. The weather conditions were also an important factor in choosing vacation days.
To test whether the stock price exhibited abnormal behavior around CEOs’ vacation plans, the author uses the Fama–French four-factor model. There was a significant excess return of 17 bps per day three days prior to CEOs leaving the office and 20 bps per day for three days after they returned to work. This result indicates that companies release good news before CEOs leave for vacation and then hold over subsequent news announcements until they return to work. The author also presents results that indicate a significant drop in volatility when CEOs are at their vacation homes.
Abstractor’s Viewpoint
The author acknowledges a few limitations in this study. One such limitation is that when CEOs leave the headquarters, it is not clear whether they are leaving for vacation or for a routine trip for work. Another limitation is that there is no way of knowing that the CEO is a passenger when the corporate jet is being flown. The author is also not able to identify when CEOs travel on commercial airlines or use time-sharing private jet services to go to the vacation homes. Nonetheless, the main results and implications of the study are very interesting and robust. There is a very easy and practical way for investors to benefit from this study. Of course, the widespread understanding of the results of this study will cause the profit opportunities to vanish.