Investors may want to do more than just listen to what CEOs say at companies' annual shareholder meetings —they should pay attention to where they're being held.
Before Corporate America's annual meeting season gets underway, a new study by professors at Temple University and New York University called "Evasive Shareholder Meetings" finds that when companies move their annual meetings to remote locations, there's frequently bad news on the way. In the National Bureau of Economics Research working paper, the researchers found that companies with meeting locations far from their corporate headquarters tend to announce disappointing earnings results within the next 90 days. Their stocks also underperform the market, on average, in the six months that follow.
NYU professor David Yermack says the evidence suggests that companies may move their meetings to limit attendance by investors, analysts, the media and others who might ask probing questions. "Companies are fairly intentional about meeting far away from home when they have bad news."
The researchers looked at the locations of 9,616 annual meetings at 2,342 public companies between the years 2006 and 2010. Seventy-one percent of the time, companies hold their meetings within five miles of their headquarters; another 16 percent of meetings were held between five and 50 miles of where the company calls home. Not only do senior managers and often board members live nearby, after all, but so too do many investors.
Yet some companies selected locations that were either particularly remote (TRW Automotive Holdings, which is based outside of Detroit, held its 2007 meeting in McAllen, TX, the southern-most tip of the United States) or unusually timed (a Milwaukee-based machinery company held its 2007 meeting at 8 a.m. on the day after the Martin Luther King, Jr. holiday in Napa, Calif.). "We even found one meeting that was held in Siberia," Yermack says, though it was not included in his sample due to the company's size.
Yermack and his collaborator, Yuanzhi Li of Temple University, started with the hypothesis that companies might move their meetings to a far-off locale when they were expecting disruptions by protestors or embarrassing heckling by activist investors, in order to make it more difficult for the news media or other investors to attend. In reality, their analysis found the opposite: Companies were more likely to meet near headquarters when expecting hostile investor proposals or director elections that might invite protests.
The researchers surmise this happens both because controversial agenda items or activist opposition are already publicly known — meaning companies fear the bad publicity less — and because being close to home gives them more access to familiar resources. "It's a lot harder to get police to cooperate with you if you’re a stranger from out of town than if you're a big local employer," he says, noting the increased security many companies now have at annual meetings. "When they’re trying to hide information, that’s when they go far afield."
When Yermack and Li looked at meetings they called "remote" (those that took place both more than an hour away from headquarters and more than an hour from the nearest airport) and "exceptional" (a far-away meeting for companies that typically hold them close to home), they saw a pronounced pattern. In the six months that followed the 340 "remote" meetings in the sample, the group of companies' stock prices under-performed their market benchmarks by 6.8 percent on average. And after the 46 "exceptional" meetings, the average market under-performance was 11.6 percent, the study found. "That’s an extremely negative result to be generated as an average," Yermack says.
Perhaps directors are looking for an excuse to get away to a sunny resort in April, when it's still cold and gray in some places? That "leisure hypothesis" doesn't really hold up, according to the paper. The data "includes only a smattering of meetings in cities such as Las Vegas, New Orleans, and Honolulu, and the large majority of these are convened by companies with local headquarters," the authors write. Nevada, Yermack says, "is actually a net loser of shareholder meetings compared to the number of companies based there."
Of course, every shareholder meeting that takes place in a remote locale doesn't precede bad news. Some companies pick new locations for their annual meetings each year, or say they coordinate them near regional offices to make it easier for board members to visit those operations. But Yermack says it happens enough that he's surprised investors don't act on it more often.
"The thing that really strikes me after doing this study is how obvious this is, yet the market doesn’t internalize it," he says. "If the company announces its meeting is in Paducah, Kentucky, people should immediately be suspicious."