“Shareholders should be worried when a CEO builds a new headquarters”

When should shareholders worry about a chief executive officer? Iain Martin wrote in Making It Happen: Fred Goodwin, RBS and the men who blew up the British economy (2013):
 
“The old adage is that shareholders should be worried about the CEO becoming a megalomaniac when a company builds a grand new headquarters, and doubly worried when he puts a fountain in front of it.”
 
It’s not known when this adage started. Gunther Loffler, author of the research paper “Tower Building and Stock Market Returns” (2013), suggested that a company’s stock market share could go down when the company starts to build lavish new office towers.
 
   
Social Science Research Network
Tower Building and Stock Market Returns
Gunter Löffler
University of Ulm - Department of Mathematics and Economics
April 9, 2013
Journal of Financial Research, Forthcoming
Abstract:   
Construction starts of skyscrapers predict subsequent US stock returns. The predictive ability exceeds that of alternatives such as the prevailing historical mean, predictions based on dividend ratios and recently suggested combination forecasts. One explanation for these patterns is that tower building is indicative of over-optimism; alternatively, tower building could help to identify periods of low risk aversion. I present indirect evidence that is consistent with both explanations.
   
CBS News
By LARRY SWEDROE MONEYWATCH October 2, 2013, 10:44 AM
What building towers say about future stock returns
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Gunther Loffler, author of “Tower Building and Stock Market Returns,” hypothesized that the construction of towers (large scale projects such as the World Trade Center) could provide insights into stock returns. The premise is that tower building could be a reflection of periods in which over-optimism has led to overvalued stock markets, or it helps to identify times of low risk aversion—low risk aversion leads to low risk premiums and the funding costs for large-scale projects are lower. Low risk premiums predict low future stock returns. And, of course, status could play a role in the building of towers. While Loffler doesn’t mention it, the Empire State Building, the construction of which began just as we were entering the Great Depression, could have been the poster child for the story.
 
Google Books
Making It Happen:
Fred Goodwin, RBS and the men who blew up the British economy
By Iain Martin
London: Simon & Schuster
2013
Pg. 1967 (Google Books has this page number, but it is not on the image.—ed.):
The old adage is that shareholders should be worried about the CEO becoming a megalomaniac when a company builds a grand new headquarters, and doubly worried when he puts a fountain in front of it.
     
USA Today 
A book cometh before a CEO’s fall: Column
Zac Bissonnette 9 a.m. EDT April 20, 2014
When the boss decides to be an author, he’s decided its time to stop being the boss.
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These examples are, of course, just anecdotes. But there’s strong evidence that displays of a willingness to focus on things other than managing a core business mark the peak of an executive’s career — and, perhaps, a good time for investors to pull out. A 2007 New York University study found that stock market returns tend to decline after a CEO builds his trophy home — and other research suggests a similar drop in performance after companies build lavish new headquarters. It doesn’t seem like a stretch to suggest that a CEO stepping out to build a platform as a self-help author/speaker might correlate with the same sorts of outcomes.
 
Business Insider 
Why Investors Should Be Worried When A CEO Writes A Self-Help Book
RICHARD FELONI
MAY 7, 2014, 4:16 PM
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Publishing a self-help book is just one sign of dangerous pride, Bissonnette says in a recent USA Today op-ed. He points to a 2007 NYU study that found stock market returns fall when a company’s CEO builds his trophy home, and a German academic study that found the same thing happens when a company builds lavish headquarters.
 
The Motley Fool
3 Warning Signs That Are Rarely Wrong
By Malcolm Wheatley - Friday, 6 June, 2014 | See also: RBSRBS
Six years on, the credit crunch still fascinates me. And so, when I spotted a recently published book about Royal Bank of Scotland‘s (LSE: RBS) (NYSE: RBS.US) financial collapse, I bought it like a shot.
 
And Making It Happen, by Iain Martin — a former editor of The Scotsman newspaper — hasn’t disappointed.
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The book’s author, of course, isn’t the only person to quote the old adage about the wisdom of being worried when a chief executive builds a grand new headquarters — and being doubly worried when he puts a fountain in front of it.