Corporate Jets, management entrenchment, and the lessons from Tesco

Tesco has been in the wars lately, with a major restatement of its earnings having caused carnage to its share price and reputation.

Screenshot 2014-10-04 08.49.40

Now we see the Tesco has taken delivery of a brand-new shiny executive toy, a Gulfstream jet.

To be fair  the new management have decided that they will immediately dispose of this jest, ordered under previous management.

Some 2012 research suggests that private jets, perhaps the ultimate perk for many chief executives, are a really good way to differentiate between firms that do and do not suffer from what are called “agency problems”.  In a nutshell agency problems are where managers run the company for their own benefit, rather than for the benefit of shareholders.    The paper looks at the firms which are owned by private equity companies, a pretty ruthless bunch of operators whose main role  is to squeeze much greater efficiencies out of companies, comparing them against a matched sample of publicly quoted companies.   They find that companies owned by private equity tend to have jet fleets which are 40% smaller than those which are publicly owned.   This is pretty non-linear as well, in that these results really only begin to kick in a new get into larger jet fleets, size measured by seats.   The results are in fact driven by the top 30% (of jet ownership) of companies.As a robustness check the researchers also look at companies involved in merger snack positions, and that companies going into leveraged buyouts.   Target company’s jet fleets fall, as do those of companies that are the target of leveraged buyouts.

We’ve known this for a while,  A 2006 paper looked at managers use of corporate jets.  this is a nice perk, better even than having a corporate jet for business purposes.  Companies that allow senior management to use corporate jets for personal business on average show a 4% per annum underperformance relative to a matched sample.

So,  managers might want to consider ditching the jet

Edgerton, J. (2012). Agency problems in public firms: Evidence from corporate jets in leveraged buyouts. Journal of Finance, 67(6), 2187-2213.
Yermack, D. (2006). Flights of fancy: Corporate jets, CEO perquisites, and inferior shareholder returns. Journal of Financial Economics, 80(1), 211-242.

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