«1. Corporate Performance_ 3 2. Corporate Governance 15 3. Mergers and Acquisitions 29 4. Key Formulas _ 51 © 2014 Allen Resources, Inc. All rights ...»
First and most important, the target’s customers must care deeply about the issue (and be on the side of the boycotting group); in this case, most of the Chick-Fil-A customer base strongly supported the restaurant’s position. Thus, the effort was doomed from the start. In addition, boycott efforts are helped when the cost of participation is low. Boycotting gasoline purchases because of “greedy oil companies” never works, as the cost to go without gas is too high for most people. However, the cost of choosing to avoid one fast-food restaurant chain is not particularly high. Boycotts are also buoyed when the issue is clear and understandable. In the case of Chick-Fil-A, it was, but many times it is not (such as boycotts over unspecified labor disputes).
An action related to consumer boycotts is divestiture, which calls for investors (especially institutional investors) to sell their holdings of certain firms which engage (or fail to engage) in specified practices. One of the more widespread cases of institutional divestiture was that of university endowments divesting of firms doing business in South Africa during the 1980s.
Selling a stock does not change the intrinsic value of the firm, but a successful divestiture
campaign can drive down the value of a firm’s stock. In addition, a successful consumer boycott can lower demand, revenue, and profit.
Governance Risk Good corporate governance should mitigate these risks substantially. If a company does not have
an effective corporate governance system, investors face:
• accounting statement risk, the risk that the financial statements and valuations made on the basis of those statements are incorrect.
• asset management risk, the risk that managers will take excessive perquisites or otherwise misuse firm assets.
• liability risk, the risk that the firm will take on excessive liabilities and hide them through off-balance-sheet transactions.
• strategic risk, the risk that managers will make decisions, such as capital budgeting expenditures or acquisitions, that are not in the best interest of shareholders.
Studies have found that companies with strong corporate governance systems are more profitable and have stronger earnings and other performance measures than companies with weaker systems. Thus, companies with strong corporate governance systems should enjoy comparatively higher valuations.
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