Hershey's Kiss-Off

Jonathan Klick (Jeffrey A. Stoops Professor of Law, Florida State University College of Law) and Robert H. Sitkoff (John L. Gray Professor of Law, Harvard Law School) have written a new article entitled Agency Costs, Charitable Trusts, and Corporate Control: Evidence From Hershey's Kiss-off, 108 Colum. L. Rev. 749 (2008).

Here is a summary of their article:

In July 2002 the trustees of the Milton Hershey School Trust announced a plan to diversify the Trust's investment portfolio by selling the Trust's controlling interest in the Hershey Company. ... This paper uses the 2002 Hershey incident as a natural quasi-experiment to investigate empirically: (1) the agency costs that are inherent in the charitable trust form; (2) the shortcomings in supervision of charitable entities by the state attorneys general; and (3) the comparative merits of takeovers (i.e., the market for corporate control) versus monitoring by controlling shareholders (i.e., the market for partial corporate control) in minimizing agency costs in corporate governance. ... Second, fear that taking on normal business risks might impair the welfare of the needy children who depend on a steady flow of dividends from the Company to the Trust has caused the Company's managers to forgo potentially lucrative business opportunities. ... Our findings therefore provide the first quantitative empirical validation, albeit in a single case study, of prior theoretical claims of agency costs in charitable trusts and inefficient management of charitable trust assets. ... Meanwhile, Fisher praised the trial court's ruling, saying that the injunction would allow him "to represent the public's interest" and would allow "the court to determine how a sale could hurt this community." ... Graphical Analysis On July 25, 2002, the day the Wall Street Journal broke the news of the trustees' plan to sell, HSY closed at an unadjusted price of $78.30, an increase of $15.80 (more than 25%) from the prior day's closing price of $62.50. ... To examine this possibility, Figure 2 and Appendix Figure A2 add contemporaneous price movements of three firms that compete with Hershey in the chocolate market: Cadbury Schweppes (CSG), Tootsie Roll (TR), and Rocky Mountain Chocolate Factory (RMCF). ... A potential criticism of using data prior to the sale window to estimate expected returns during the sale window is that the sale window might have coincided with a structural change in the relationship between HSY and the market portfolio.