Agency Costs, Charitable Trusts, and Corporate Control: Evidence from Hershey's Kiss-Off

91 Pages Posted: 31 Aug 2007 Last revised: 17 Sep 2008

See all articles by Jonathan Klick

Jonathan Klick

University of Pennsylvania Carey Law School; Erasmus School of Law; PERC - Property and Environment Research Center

Robert H. Sitkoff

Harvard University - Harvard Law School; European Corporate Governance Institute (ECGI)

Date Written: November 1, 2008


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.

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

Suggested Citation

Klick, Jonathan and Sitkoff, Robert H., Agency Costs, Charitable Trusts, and Corporate Control: Evidence from Hershey's Kiss-Off (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, Available at SSRN:

Jonathan Klick

University of Pennsylvania Carey Law School ( email )

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Erasmus School of Law ( email )

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Robert H. Sitkoff (Contact Author)

Harvard University - Harvard Law School ( email )

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