Shareholders With Sherpas a Sure Sign of a Stock to ShortMichael P. Regan
Let’s say you own stock of a company that has its annual meeting coming up. You get the itinerary from your travel agent and, ooh, does it look exciting!
First you’ll fly into Anchorage, Alaska, in February. Then, depending on conditions, you will travel by SUV or snowmobile to a helicopter that will take you into a remote mountain area. A sherpa will then lead your party on an alpine trek to the lodge where the shareholder meeting is taking place.
This is all exciting, avant-garde stuff and surely only an exciting, avant-garde company with fantastic growth prospects would consider such a remote location, right? Wrong. You should probably consider dumping all your shares and shorting the stock, a National Bureau of Economic Research study suggests.
While this hypothetical trek is obviously an exaggeration, the NBER report shows there is often bad news on the way from companies which schedule shareholder meetings far from their headquarters and major airports. Their share prices tend to suffer afterward, according to the paper “Evasive Shareholder Meetings” by Yuanzhi Li of Temple University and David Yermack of New York University that was highlighted in the July issue of the NBER Digest.
The authors examined nearly 10,000 annual meetings held between 2006 and 2010. They found that companies holding a shareholder meeting 1,000 miles away from headquarters have an average abnormal return of minus 3.7 percent during the next six months. Shareholder meetings at least 50 miles from headquarters and at least 50 miles from a major airport suffer a minus 6.8 percent abnormal return.
It really gets ugly for companies that usually hold their annual meetings near headquarters, then move it far away. The study found 46 companies that held the gathering at least 150 miles from headquarters only once in the five-year period. The average abnormal return was almost minus 12 percent.
The study offered regional bank KeyCorp as an example. The annual meeting in May 2006 was held at an art museum in Portland, Maine, rather than the bank’s usual practice of meeting near its Cleveland headquarters. KeyCorp shares trailed the Standard & Poor’s 500 Index by 3.7 percentage points in the next six months.
The reasons for holding meetings far from home are pretty easy to guess. Companies are more likely to announce poor earnings in the aftermath of long-distance meetings, according to the study. (For what it’s worth, KeyCorp beat the average analyst earnings estimate for three straight quarters after that 2006 meeting. KeyCorp spokesman Jack Sparks declined to comment.)
Managers also may want to deter attendance by shareholders, the news media, and other groups in order to minimalize protests and avoid difficult questions, according to the study.
After all, not many reporters can get away with a sherpa bill on their expense account.