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

Abstract

In July of 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, brought suit to stop the sale on the grounds that it would harm the central Pennsylvania community. In September 2002, 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 econometric analysis, we 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. 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 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. Our findings contribute 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 charitable entities by the state attorneys general. Our findings also contribute to the literature of corporate governance by measuring the difference in firm value when the Hershey Company was subject to a takeover versus under the control of a controlling shareholder. * Visiting Professor of Law, University of Pennsylvania (Fall 2007); Visiting Professor of Law, Columbia University (Spring 2008); Jeffrey A. Stoops Professor of Law, Florida State University . ** John L. Gray Professor of Law, Harvard University . The authors thank Evelyn Brody, John Coates, John Columbo, Harvey Dale, Joel Dobris, Einer Elhauge, Allen Ferrell, Jonah Gelbach, Eric Helland, Adam Hirsch, Edward Iacobucci, Marcel Kahan, Louis Kaplow, Ehud Kamar, Reinier Kraakman, Robert Lawless, John Langbein, James Lindgren, Yair Listokin, Geoffrey Manne, Henry Manne, John McGinnis, Richard Posner, Edward Rock, Larry Ribstein, Dan Rubinfeld, Max Schanzenbach, Kathryn Spier, Mark Weinstein, and workshop participants at FSU, Harvard, Illinois, Northwestern, NYU, and the 2007 Annual Meeting of the American Law and Economics Association for helpful comments and suggestions; Teresa Gallego O’Rourke, Kelley Smith, Shira Tydings, Ethan White, Rachel Zeehandelaar, and Annmarie Zell for superb research assistance; and Harvard Law School and NYU School of Law for financial support. 108 Columbia Law Review ___ (forthcoming 2008) Draft of September 2, 2007 ii Agency Costs, Charitable Trusts, and Corporate Control: Evidence From Hershey’s Kiss-Off