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Some companies go far to dodge shareholders

May 14, 2014: 2:43 PM ET
Southwest Airlines

Southwest had its annual meeting in its hometown of Dallas. But some companies travel far away from their headquarters.

Shareholders of Southwest Airlines (LUV) gathered Wednesday in Dallas -- the city where the company is located -- for Southwest's annual meeting.

It's a scene every company knows well: That yearly reunion of corporate executives, faithful investors and, often, a few "gadflies" who want to vent their issues.

Holding these annual shareholder gatherings is a requirement for publicly traded companies in the U.S. and many other countries.

Most hold their meetings in the same place -- often their "corporate hometown" -- year after year. Who could imagine Warren Buffett's Berkshire Hathaway (BRKA, BRKB) meeting anywhere other than Omaha? Or Microsoft (MSFT) somewhere other than the Seattle area?

Related: Berkshire shareholders LOVE Buffett

According to a recent study by two economists, 71% of meetings follow the normal pattern of meeting near the company's headquarters -- defined as within five miles. Another 16% take place 5 to 50 miles away.

But the shareholder meetings that were held further away from a company's hometown turned out to be quite interesting. In fact, those companies tended to suffer from poor performance in the months following the meeting.

"Companies are more likely to announce unfavorable quarterly earnings in the aftermath of long-distance meetings, and these firms' stock prices significantly underperform market benchmarks over the six months following the meeting date," according to the study by David Yermack, a professor of finance at New York University's Stern School of Business, and Yuanzhi Li, an assistant professor of finance at Temple University's Fox School of Business.

Yermack and Li looked at about 10,000 annual shareholder meetings that thousands of U.S. public companies held between 2006 and 2010.

Executives often don't make negative announcements at the meetings themselves, but they still opt for difficult locations in an attempt to avoid tough questions from shareholders -- and the press.

"What seems to be obvious is [management] knows things are going badly for the firm. They'll have to own up eventually to bad earnings," Yermack told CNNMoney.

Related: Shareholder activists up their game

There are many reasons companies hold meetings in places other than their corporate home. General Electric (GE), for example, moves its meetings around annually, often to cities it has business ties to or subsidiaries in.

This year's GE shareholder meeting took place in Chicago in April, and last year's was in New Orleans.

But the study found that companies which opt for a "far flung" destination for a meeting typically don't go to a subsidiary's town or the usual luxury locales like Las Vegas. Nevada is actually underrepresented, according to the study, meaning there are fewer meetings held there than one would expect given the number of companies headquartered nearby.

Instead, firms that want to hide head to places like McAllen, Texas.

That's on the border with Mexico and more than 300 miles from the nearest major airport in Houston.

But TRW Automotive Holdings (TRW), an auto parts manufacturer based out of Detroit, went there in 2007 for its annual meeting. TRW's shares were trading as high as $41 in the spring of 2007, but ultimately fell to $20 by the end of that year.

Companies also play around with the date and times of meetings. The vast majority of meetings are held on Tuesdays, Wednesday or Thursdays around 10a.m. Deviation from that can be a red flag (although Warren Buffett's Berkshire Hathaway meets on a Saturday and its stock is doing just fine).

The impetus for the study was Ekkehard Wenger, a German professor and shareholder activist who often shows up to company meetings in his home country.

Wenger claims that he learns a lot about the outlook for a company simply by observing the body language of executives at the meetings.

And while it is more difficult for German companies to hold shareholder meetings in "remote" locales, Wenger points out that Daimler (DAI), based in Stuttgart, has been known to hold meetings in Berlin to escape the wrath of local shareholders.

"Pressuring management during a shareholder meeting and observing management's reaction to 'unpleasant' questions is a strong predictor of future performance," he said.

So if you do happen to attend any shareholder meetings in the next month or so, be sure to watch how executives behave when they answer questions. That may tell you a lot about where the company is heading ... especially if you needed to travel a long way to get to the meeting in the first place.

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