Agency Costs, Charitable Trusts, and Corporate Control: Evidence from Hershey's Kiss-Off
University of Pennsylvania Law School; Erasmus School of Law; PERC - Property and Environment Research Center
Robert H. Sitkoff
Harvard Law School
November 1, 2008
Harvard Law and Economics Discussion Paper No. 593
Columbia Law Review, Vol. 108, No. 4, 2008
FSU College of Law, Law and Economics Paper No. 07-16
FSU College of Law, Public Law Research Paper No. 273
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. The Company's stock jumped from $62.50 to $78.30 on news of the proposed sale. But the Pennsylvania Attorney General, who was then running for governor, opposed the sale on the ground that it would harm the local community. Shortly after the Attorney General obtained a preliminary injunction, the trustees abandoned the sale and the Company's stock dropped to $65.00. Using standard event study methodology, we find that the sale announcement was associated with a positive abnormal return of over 25% and that canceling the sale was followed by a negative abnormal return of nearly 12%. Our 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 of roughly $850 million and foreclosed salutary portfolio diversification. Furthermore, blocking the sale destroyed roughly $2.7 billion in shareholder wealth, reducing aggregate social welfare by preserving a suboptimal ownership structure of the Company. Our analysis contributes to the literature of trust law by supplying the first empirical analysis of agency costs in the charitable trust form and by highlighting shortcomings in supervision of charities by the state attorneys general. We also contribute to the literature of corporate governance by measuring the change in the Company's market value when the Trust exposed the Company to the market for corporate control.
Number of Pages in PDF File: 91
Keywords: agency costs, charitable trust, corporate control, controlling shareholder, takeover, attorney general, event study, randomization inference, hershey, hershey trust, hershey company, nonprofit, charity governance
JEL Classification: G14, G34, K11, K22, L31
Date posted: August 31, 2007 ; Last revised: September 17, 2008
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