Research Paper: Determination of Executive Actions for Self-Enrichment (EASE) at the Cost of Corporate Integrity
In the depths of the initial pandemic, my friend (and now-Entrepreneur in Residence of Novatero) Chris Graham sent along a blog post from Ben Hunt titled “Do The Right Thing”. In it, Hunt strikes out with some Samuel L. Jackson-esque great vengeance and furious anger regarding the caterwauling of the big four US airlines for bailout money. Yes, air travel dropped around 96% at the peak of the pandemic, but Hunt points out that instead of accumulating a war chest of cash and capital during the boom times, the airlines had used their free cash flow as well as overleveraged their debt in order to purchase stock buybacks. These stock buybacks served to inflate their share prices, upon which the executives at the airlines sold reams of their stock-based compensation at these inflated prices, mostly via private sales so their profiteering wouldn’t be noticed by the market. These executives made off like bandits while their companies’ financials struggled to stay flat, and now they’re asking for government handouts? Needless to say, Chris’ attempt to draw me into researching a quantitative output to reflect these actions was all but guaranteed after reading the article.
What followed was the creation of the Executive Actions for Self-Enrichment , or EASE, score. EASE is a score that is calculated quarterly in order to determine where on the scale from integrity to self-enriching a company falls. We look at companies in the Russell 3000 index, scoring them from zero (executives hollowing out a business for their personal gain) to 100 (strong decisions aimed toward long-term business goals) through a quantitative factor model that take inputs from pricing data, quarterly financial data, and SEC Form 4 data. SEC Form 4 is the form that executives at a public company fill out when any sale or purchase of company stock is made. By quantifying this data and inserting it into the model, we are able to see periods where a rise in debt and/or share buybacks corresponds with an offloading of executive stocks. EASE is robust over the past 6+ years and even sees some promise as a leading indicator for future returns. We are currently paper trading an investment strategy based on EASE that is showing some strong initial promise.
EASE scores are a solid reflection of how US public companies are operating and would be best-served as a resource for the public to truly understand how these companies are running themselves, allowing the public to make more-informed decisions about which companies to invest in or patronize*. That’s why, starting in Q4 2020, we will providing quarterly updates to EASE scores right here on the Novatero website…completely free of charge.
The paper can be found here: Determination of EASE. As per usual, please do not hesitate to contact me about any questions, comments, concerns, or discussions you’d like to have about this paper or the investment strategy we’re testing. Enjoy!
* both definitions of the word are applicable