Influencing Managers to Change Unpopular Corporate Behavior through Boycotts and Divestitures: A Stock Market Test¶
Wallace N. Davidson III; Dan L. Worrell; Abuzar El-Jelly (1995). Influencing Managers to Change Unpopular Corporate Behavior through Boycotts and Divestitures: A Stock Market Test. Business & Society 34(2). Sage Publications (International Association for Business and Society).
| Type | journal article |
| Scope | Comparative and methods |
| Method | econometric |
| Period studied | 1969–1991 |
| Regions | United States, South Africa (as target of divestment campaigns) |
| Themes | sanctions divestment, comparative theory, methods data sources, business and state |
| Citation key | iii1995 |
Argument¶
The authors build an agency-theory model arguing that managers are unlikely to change unpopular corporate behaviour unless an organised protest hurts shareholder wealth through a falling stock price. They test this with an event study of press-reported product boycotts and stock divestitures announced 1969-1991. Boycott announcements are associated with significantly negative abnormal returns, while divestiture announcements (mostly anti-apartheid) produce no significant reaction. They conclude that boycotts are more effective than divestitures at motivating corporate change, a conclusion supported by the higher share of firms announcing behaviour changes after boycotts (about 33%) than after divestitures (about 11%).
Evidence and method¶
Announcements in the Wall Street Journal, Washington Post, Los Angeles Times, Chicago Tribune and St. Louis Dispatch, 1969-91: 59 boycott announcements against NYSE/AMEX firms (40 are boycott beginnings, 10 are endings), 8 OTC boycott announcements, and 35 divestiture announcements, nearly all tied to South Africa. Stock returns come from CRSP tapes. Press reports and annual reports are used to trace announced behaviour changes.
Findings¶
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Boycott announcements bring significant negative abnormal returns on announcement day (Day 0) across the full sample (p. 18)
On Day 0, the MCPE is -0.32 (z =-2.01, p = .0445), which is significant at the .05 level.
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Announced stock divestitures produced no significant market reaction (p. 19)
All MCPEs are insignificant at the .05 level. This is consistent with Hypothesis 2. There is no apparent negative reaction to announcements that stockholders will divest themselves of stock.
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Boycotts are associated with more negative returns than divestitures on Day -1 (p. 19)
On Day —1 the difference is -0.76 (t =—2.42, p = .0162), which is significant at .05.
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The divestiture sample is dominated by South Africa-related cases, which limits generalisation (p. 13)
the vast majority of the 35 stock divestiture announcements were attributable to company ties with South Africa.
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About a third of boycotted firms announced behaviour changes (p. 21)
Of the 59 firms with boycotts, there were 20 announced behavior changes. This is about 33%.
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Few divested firms announced behaviour changes, and some explicitly refused (p. 21)
From the original 35 firms hit by divestitures, this is about 11%. There were three firms (Chevron, Union Carbide, and Warner Lambert) that announced they were not changing their behavior
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The theoretical reason divestment has no price effect is that other investors buy the shares and expected cash flows are unchanged (p. 22)
This is consistent with the expectation that other investors buy the divested stock and with a consequent lack of effect on expected cash flows.
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The timing of divestment announcements tracks the US sanctions and Sullivan Principles milestones (p. 22)
These frequencies coincide with the passage in 1986 of the Comprehensive Anti-Apartheid Act, with the Reverend Leon Sullivan’s disassociation with the Sullivan Principles in 1987
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Divestment may still harm a firm through reputation and managerial distraction even without a price effect (p. 23)
they may capture the kind of media attention that can harm a firm’s image, as boycotts can. Employee morale as well as employee recruitment may be affected