Tuesday, November 13, 2007
For those of you following the drama at Hershey's, I've been meaning to post a link to a terrific new paper by Jonathan Klick and Robert H. Sitkoff entitled Agency Costs, Charitable Trusts, and Corporate Control: Evidence from Hershey's Kiss-Off. The authors examine the 2002 planned sale by the Milton Hershey School Trust of its controlling interest in the Hershey Company. The Pennsylvania attorney general, who was then running for governor, brought suit to stop the sale on the grounds that it would harm the central Pennsylvania community. When the attorney general obtained a preliminary injunction with respect to any sale by the trust, the trustees abandoned the sale. The authors use standard event study econometric analysis to find that the sale announcement was associated with a positive abnormal return of over 25 percent and that canceling the sale was followed by a negative abnormal return of nearly 12 percent. In their words:
[o]ur findings imply that instead of improving the welfare of the needy children who are the Trust's main beneficiaries, the attorney general's intervention preserved charitable trust agency costs on the order of roughly $850 million and prevented the Trust from achieving salutary portfolio diversification. Overall, blocking the sale destroyed roughly $2.7 billion in shareholder wealth, reducing aggregate social welfare by preserving a suboptimal ownership structure of the Hershey Company.