An Easy Trick To Figure Out If A Company Has Secrets To Hide

An Easy Trick To Figure Out If A Company Has Secrets To Hide

People tend to skedaddle out of town whenever they smell trouble. Apparently, companies do the same thing.

Companies that schedule annual shareholder meetings in unusually remote locations tend to announce bad news fairly shortly thereafter, according to a new study by Yuanzhi Li of Temple University and David Yermack of New York University. And those companies usually see their stock prices tumble, too, according to the study.

In other words, if you want to know whether a company is about to hit hard times, keep an eye on where it schedules its annual meeting. Often, the more surprising the location, the worse the news, and the harder the company's stock price falls.

"[W]e find that managers schedule long-distance meetings when the firm is experiencing adverse operating performance that is not already known to the market," the authors wrote. "Company stocks perform very poorly in the aftermath of remote meetings, and part of this result stems from disappointing quarterly earnings announcements following these meetings."

Annual meetings are where shareholders, analysts and board members get a chance to pepper corporate managers with questions. Typically, the shareholders, analysts and board members who live closest to the company know it best. So if you're a company with a nasty secret to hide, it makes sense to get as far away as you can from the people who know you best, to make it more difficult for them to ask you hard questions. It's not unlike how companies sometimes choreograph earnings calls so that only friendly analysts ask questions, in order to hide bad news.

"By moving the meeting far away, the managers might forestall shareholder or news media questioning that could lead to the early disclosure of adverse news," the study's authors wrote.

And companies aren't scheduling these remote meetings in happy fun-time places like the Bahamas or Las Vegas -- "resort" locales get surprisingly little annual-meeting business, according to this study. Instead, these companies apparently want traveling to their annual meeting to be a real chore.

Investors don't seem to have caught on to this trick yet. The study found that companies scheduling remote annual meetings have significantly worse stock performance in the months that follow. Companies that hold meetings at least 50 miles from their headquarters and 50 miles from a major airport do 6.8 percent worse than the broader market over the next 6 months, according to the study.

There are some exceptions to this rule of thumb: General Electric, for example, moves its meeting location to a new place every year, seldom coming anywhere near its Connecticut headquarters. You won't be able to get any read on GE by watching its travel schedule.

And a strange annual-meeting locale isn't always a harbinger of doom. You shouldn't mortgage your house to short every company that picks an unusual meeting spot. But it's not a good sign.

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