If a company has bad news that it wishes to hide, where will it hold its shareholder meeting? As far away as possible! That’s the hypothesis of an ingenious paper entitled “Evasive Shareholder Meetings”, by Yuanzhi Li (Temple) and David Yermack (NYU Stern) that I saw at the Rotterdam Workshop on Executive Compensation and Corporate Governance yesterday.
Companies are forced to hold shareholder meetings once a year. But, such meetings can be notoriously inconvenient for management. For example, at McDonald’s 2013 shareholder meeting, a 9-year old girl was famously planted to tell CEO Don Thompson “it would be nice if you stopped trying to trick kids into wanting to eat your food all the time”. Thompson’s spontaneous response, “we don’t sell junk food”, went viral and was ridiculed by the media.
Thus, if the company expects trouble brewing, it can choose to hold its meeting at an inconvenient location, to deter shareholders or the press from attending. This in turn implies a trading strategy for astute investors – short companies with remote meetings.
70% of shareholder meetings are non-evasive, occurring within 5 miles of the headquarters. But at the other extreme, Li and Yermack found 34 meetings that took place overseas. General Cable is headquartered in Kentucky but has held its annual meetings in Spain, Costa Rica, and Germany; a mining company held a meeting at one of its mines. Even for domestic meetings, the company can choose to hold it hundreds of miles from a major airport. For example, TRW Automotive held its 2007 meeting in McAllen, Texas, at the Southern tip of the continental United States near the Mexican border – 1,400 miles from the company’s headquarters outside Detroit, and 300 miles from the nearest major airport (Houston). One company held its meeting in Lahore, Pakistan – so shareholders would have to brave terrorist threat to attend it. (However, this meeting was not included in the final analysis due to the unavailability of other data).
Particularly suspicious are companies that hold the meeting at the same location every year, but make a one-time deviation. For example, 9 out 10 years, the regional bank KeyCorp held its annual meeting close to its Cleveland headquarters, but in one year it held it at an art museum in Portland, Maine. The authors found that firms that hold these exceptional meetings – that involve one-time deviations – underperform their peers by 11.7% over the next six months. Similarly, companies that hold their meetings at remote locations (defined as 50 miles from their headquarters and 50 miles from a Tier 1 airport) underperform by 6.8%. Moreover, the future underperformance goes up with both distance measures.
Most shareholder meetings take place in May. Thus, the subsequent 6-month period typically includes the firm’s Quarter 2 and Quarter 3 earnings announcements. Over the whole sample, the average return to an earnings announcement is +0.41%, because firms typically meet or beat their earnings target. However, firms that hold exceptional meetings (a one-time deviation from the standard location) suffer returns of -2.24% at future earnings announcements, suggesting that they miss their targets.
The idea of evasive management is related to this earlier post on a paper showing that companies who avoid questions from pessimistic analysts (during earnings calls) subsequently underperform. Both papers are very clever ways to identify shifty managers with something to hide, and use this to form a profitable trading strategy.