Those interested in trying to identify possible corporate risk indicators will want to take a look at a March 18, 2014 paper by Temple University finance professor Yuanzhi Li and New York University finance professor David Yermack entitled “Evasive Shareholder Meetings” (here). According to the authors’ research, there is a strong negative correlation between distant annual meeting locations and stock price declines over the ensuing six months.
The authors’ research was described in a May 8, 2014 New York Times article entitled “Beware When the Annual Meeting in is Moose Jaw” (here).
The authors created and studied a data set of 9,616 annual meetings held by 2,542 public companies between 2006 and 2010. The authors found that most shareholder meetings took place close to company headquarters; over 87% of annual meetings took place within 50 miles of the headquarters.
But the authors also noted something very interesting about the companies that held their annual meetings further away. They found a “systematic pattern of poor company performance in the aftermath of annual meetings that are moved a great distance away from company headquarters.”
The authors found that companies holding their annual meetings at least 50 miles away from their corporate headquarters and 50 miles away from an FAA large hub airport underperformed the stock market by about seven percent in the following six months. The authors noted that “companies that held long-distance annual meeting experience subsequent abnormal returns that are negative, statistically significant and of large magnitude.”
This finding, the authors say, “suggests that management knows adverse news when choosing the location of these meetings, and it may move them far from headquarters as part of a scheme to suppress negative news for as long as possible.” The authors add that “Companies appear to schedule meetings in remote locations when the managers have private, adverse information about future performance and wish to discourage scrutiny by shareholders, activists and the media.”
The authors rule out the possibility that the motivation for moving the annual meeting to a distant location was “leisure” or “tourism.” They found that in fact annual meetings only rarely take place at resort locations, and that leisure states like Hawaii and Louisiana have almost exactly the number of meetings predicted by headquarters locations.
One example cited in the authors’ study relates to the TRW Automotive Holdings 2007 annual meeting. That year – by contrast the annual meetings held in 2008, 2009 and 2010, which were held in New York – the company held its annual meeting in McAllen, Texas, at the Southern tip of the United States and 1,400 miles from the company’s headquarters outside of Detroit. The authors noted with respect to this meeting: “In line with the results of this study, the company’s stock price fell from $38.97 on the day of the 2007 annual meeting to $25.90 six months later, a drop of 33% during a period when the S&P 500 index fell just 2%.” (The Times article cited above quotes a TRW spokesman as saying that the company has a warehouse in McAllen and stating that the downturn was “really more about timing” and that the company has since had a robust recovery)
Interestingly, stockholders do not seem to have “decoded” that a remote annual meeting location flags future adverse results, since the company share price for companies with far-flung annual meetings generally does not decline at the time the meeting is announced, but only after the meeting has taken place. As the authors note, “it is less obvious why shareholders fail to decode such an unambiguous signal at the time the meeting location is announced.” (The Times article quotes Broc Romanek of the TheCorporateCounsel.net (here) as saying that since most annual meetings are “purely perfunctory,” a remote location “is a clear signal that the company does not respect its shareholders.”)
The authors’ conclusions are valuable for shareholders interesting in understanding factors that may indicate future share price directions. The authors’ conclusions may also provide useful insight for D&O insurance underwriters. Of particular interest is the authors’ conclusion that the selection of a remote annual meeting location may predict adverse but not yet disclosed financial information that could have a negative impact on the company’s share price. In light of this observation, D&O underwriters may want to consider looking into the location of the company’s annual meeting, particularly if it has not yet taken place. An annual meeting venue far from corporate headquarters could represent a possible risk indicator.