Saturday, February 24, 2018
At this point, drawing inferences from corporate jet usage is its own mini-genre in the business literature. There was David Yermack’s famous Flights of Fancy, which found that companies underperform when the CEO makes use of the company jet for personal business (often, apparently, golfing-related business); other studies have found that corporate jet use can enhance firm value, or detract from it, depending on whether the company has weak corporate governance, and that public firms have larger jet fleets than firms owned by private equity funds, suggesting the excessive fleet size is due to agency costs in public firms.
(And these studies, naturally, were conducted before everyone knew about GE’s now-discontinued practice of having its CEO travel with a jet and a spare.)
Now there’s a new contribution to the genre: Corporate Jets and Private Meetings with Investors, by Brian J. Bushee, Joseph J. Gerakos, and Lian Fen Lee.
The authors begin with the previously-documented phenomenon that when investors have the opportunity to engage in private meetings with corporate management, their trading improves. Regulation FD prohibits management from providing these investors with nonpublic material information, but somehow – whether through outright violations of the rule or simply subtle cues that the investors can synthesize with their own information – these meetings benefit investors who are fortunate enough to have the opportunity to participate in them.
The rest of the world, however, usually doesn’t know when these meetings are taking place. If they occur at a publicized conference researchers can deduce their existence, but otherwise, there’s no obvious way to tell.
The authors figured out that they could deduce when private meetings were taking place by tracking corporate jet usage. They found that when the corporate jets were used to rapidly fly to multiple cities where their investors are based, there are increases in the level of local institutional stock ownership, and detectable market reactions (which the authors attribute to investors acting on what they believe to be improved private information). The authors also found that these trips were more likely to occur when the firm was undergoing various conditions that might increase investors’ demand for information.
The part that I find interesting, though, is that evidence was mixed as to whether institutions were actually benefitting from these meetings in the form of trading gains – and they were more likely to do so when the trips were taken to large cities with finance industries rather than to other locations. The authors don’t say it, but that piece makes me wonder if there’s a distinction in investor sophistication at play; all investors are not created equal, and some institutions may be better able to make use of the information revealed in private meetings than others.