The following post comes to us from David Yermack, Professor of Finance at the NYU Stern School of Business.

In the paper, Tailspotting: How Disclosure, Stock Prices and Volatility Change When CEOs Fly to Their Vacation Homes, which was recently made publicly available on SSRN, I document a close connection between the timing of corporate news disclosures and CEOs’ personal vacation schedules. I find that companies tend to disclose favorable news just before CEOs leave for vacation and then hold over subsequent news announcements until they return to headquarters. During periods when CEOs are away from the office, stock prices behave quietly with sharply lower volatility than usual. Volatility increases immediately when CEOs return to work. I identify CEO vacation trips by merging publicly available flight histories of corporate jets with on-line real estate records that indicate locations where CEOs own vacation residences, often in upscale oceanfront communities in Florida or New England or close to golf or ski resorts.

For example, on January 7, 2010, aerospace manufacturer Boeing Co. disclosed a 28% increase in annual commercial airliner deliveries and also issued an earnings forecast for the year ahead. Boeing stock rose 4%, capping three days in which it outperformed the market by almost 10%. The company’s shares were quiet for the next several weeks, not moving significantly again until January 27, when Boeing announced strong quarterly earnings and its stock rose more than 7%. In between these announcements, Boeing’s CEO appears to have been on vacation, an inference based upon Federal Aviation Administration (FAA) records of company aircraft trips to and from an airport near his vacation home in Hobe Sound, FL. During this vacation period, the annualized volatility of Boeing’s stock dropped to 0.16, an unusually low level for a major blue chip. During the three days before and three days after his trip, the volatility was more than twice as high at 0.40.

I find similar patterns for a sample of 230 vacations lasting five work days or longer, taken by CEOs of 66 major U.S. companies during the four year period 2007-2010. To obtain aircraft flight histories, the key information needed to identify vacation dates, I use The Wall Street Journal’s Jet Tracker database, a searchable Internet archive of trips by all aircraft registered to U.S. businesses during 2007-2010. While I do not know for certain that the CEOs are passengers on every flight to and from the airports near their vacation homes, executive compensation disclosures indicate substantial personal use of corporate aircraft use by nearly all the CEOs in the sample. In the case of Boeing, the company disclosed an incremental cost of $303,962 for personal use of company aircraft in 2010 by its CEO, W. James McNerney Jr. Estimates on the Jet Tracker database put the incremental cost of a typical corporate aircraft flight in the neighborhood of $5,000 to $10,000 (depending on the plane model and distance flown), implying that Boeing’s CEO took a large number of personal trips on the company’s executive jet in 2010.

The results of this study illuminate a facet of corporate disclosure policy rarely noticed by investors or regulators. Since the 1930s U.S. authorities have established detailed ground rules for the timing of company disclosures by enacting rules such as Regulation FD and the Sarbanes-Oxley Act (SOX); since it became effective in 2004, SOX has required companies to disclose a wide range of material events on Form 8-K within either two or four business days. Notwithstanding these regulations, my results strongly suggest that companies coordinate public news disclosures with the personal schedules of their CEOs. In particular, companies appear to empty their queues of news announcements just before CEOs leave for vacation, and then delay subsequent disclosures until CEOs are back in the office.

The causation underlying these patterns is not obvious: companies may fix their schedules of news releases to accommodate CEOs’ vacation plans, or CEOs may travel only when they expect no significant activity at the office and may cut short vacations when news arises. Data are somewhat consistent with the latter pattern, as stock volatility for the sample companies rises just before the end of the 230 longer vacation intervals in my sample, and in a number of cases CEOs appear to interrupt vacations, flying back to headquarters for just one day and then resuming their time off. However, a bivariate probit model presented below indicates that news disclosures appear to be linked to CEOs’ vacations even after using weather variables to control for endogeneity of the vacation schedule.

Regardless of the direction of causation, the movement of a company’s aircraft to and from a CEO’s vacation residence provides a very visible signal of pending news announcements and silences. With a trivial amount of research and monitoring, investors could observe flights of corporate aircraft in real time between the headquarters airport and a CEO’s vacation locale, either by monitoring live FAA data on the Internet or stationing scouts for “tailspotting” of tail numbers of planes that land at leisure airports favored by CEOs such as Nantucket, MA, or Naples, FL. This information could support straightforward trading strategies, such as using derivatives to bet on declines in volatility when a CEO arrives at his vacation airport and increases in volatility when he departs. A similar pattern of volatility changes tied to the arrival of transport vessels is described by Koudijs (2010) in his historical account of British company shares trading on the Amsterdam exchange during the 18th century. By merging the schedules of mail boats carrying news from England with daily share price changes in Amsterdam, Koudijs shows that volatility of stocks rose markedly when ships put into port. In this study, the mechanism by which information reaches the market is somewhat different than in Koudijs’s; whereas the mail boats in 18th century Europe transported market-relevant news from abroad directly to investors, a 21st century CEO’s corporate jet seems to carry a gatekeeper who personally controls the release of news, and whose absence from headquarters implies an extended silence by the firm.

The full paper is available for download here.

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