The Financial Impact of Boycotts and Threats of Boycott

The Financial Impact of Boycotts and Threats of Boycott Paul Sergius Koku FLORIDA ATLANTIC UNIVERSITY

Aigbe Akhigbe FLORIDA ATLANTIC UNIVERSITY

Thomas M. Springer FLORIDA ATLANTIC UNIVERSITY

The impact of actual boycotts and threats of boycott on the value of target firms was analyzed using the event study methodology. The results are counter-intuitive. The value of target firms increased, on average, by 0.76% on the day that news of the boycott became public. On the other hand, the value of the target firms increased by only 0.55% on the day that information of the threat of boycott became public. However, there is no significant statistical difference between the market’s reaction to actual boycott and threats of boycott. When combined, without distinction between actual boycotts and threats of boycott, the value of target firms increased, on average, by 0.66%. The results also show that the market does not react differently to whether boycotts/threats are union sponsored or non-union sponsored. J BUSN RES 1997. 40.15–20  1997 Elsevier Science Inc.

E

mployees and consumers in a free market economy, who find themselves disadvantaged in negotiating with a powerful and sometimes uncompromising employer or firm, generally resort to two main mechanisms; a strike action or a boycott for empowerment to negotiate. A strike action involves work stoppage and is more likely to be used by current employees. A boycott, on the other hand, is a refusal to engage in transactions with the the boycott target. As such, it lends itself for use by more diverse groups, such as consumer and religious groups, environmentalists, and others who may not necessarily be in the employment of the boycott target but consider themselves affected in some way by the target organization. Unlike a strike action whose financial impact on the target firm is a potential loss due to work stoppage which can be

Address correspondence to Paul Sergius Koku, Florida Atlantic University, College of Business, University Tower, 220 SE 2nd Ave., Fort Lauderdale, FL 33301. E-Mail: [email protected] Journal of Business Research 40, 15–20 (1997)  1997 Elsevier Science Inc. All rights reserved. 655 Avenue of the Americas, New York, NY 10010

easily determined and readily computed, the financial impact of a boycott is not as obvious. Because boycotts involve “refusing to deal,” which includes refusing to patronize a manufacturer’s product or service, they rely mainly on moral persuasions to be effective. If boycotters could elicit a substantial sympathy, then it is likely that the combined effect of boycotters and their sympathizers could inflict a substantial financial penalty on the target. Boycotts and threats of boycott are now employed more frequently than ever. According to Hayes and Pereira (1990), at least 300 such activities had been reported in 1990 alone, as of November of that year. This represents an increase of 769% from the 39 reported in 1984. Students of such activities believe that they have become a common fixture on the landscape of American businesses because people regard these activities as a freedom of expression inherent in the democratic process (see Handler, 1969). Several other reasons have been attributed to the phenomenal increase in the use of boycotts, the most common being the changing business environment. Because businesses are becoming larger, more competitive and less personable, they are perceived as less responsive to the demands of certain factions in their external environments (Etzioni, 1969). Feeling ignored and alienated, these factions resort to the use of boycotts as a means to exert pressure on the target firms to meet their demands. Also, consumers are becoming more informed and in certain instances increasingly militant (Handler, 1969). In contrast to the increasing frequency of their use, only a few studies have investigated the effectiveness of boycotts as a negotiating tool for organized groups. Friedman (1985) in a qualitative study examined 90 separate consumer boycotts which occurred between 1970 and 1980 and concluded that only 24 of 90, or 26.7%, could be considered successful or partially successful in attaining their desired objectives. In a separate study, Pruitt and Friedman (1986) employed ISSN 0148-2963/97/$17.00 PII S0148-2963(96)00279-2

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the event study methodology, a technique commonly used in finance and economics, to analyze 21 of the 90 boycotts studies by Friedman (1985). These concluded that 16 of the 21 events, or 76%, are successful in inflicting substantial financial loss on the target firms. In yet another study Pruitt, Wei, and White (1988) examined the financial impact of 16 union-sponsored boycotts using the event study methodology. The results of the study suggest that union-sponsored boycotts are successful, in the short term, in inflicting substantial financial losses on the target firms. However, their study, like the previous studies, does not distinguish between threats of boycott and actual boycotts. Do threats of boycott also inflict substantial financial loss? And is there a difference between union and non-union sponsored boycott effects? The objective of this article is to determine whether threats of boycott have the same impact as actual boycotts. If actual boycotts are effective in inflicting substantial financial losses, then it behooves organizations to take threats of boycott very seriously and react accordingly. At the same time, the seriousness of boycott actions will be such that the financial markets will react also to boycott threats. After all, it is information on pending actions that counts in efficient markets. To the degree financial markets are informationally efficient, we can expect the markets to react with the same level of intensity to threats of boycotts. Furthermore, the rational expectations hypothesis suggests that asset prices incorporate all the information currently available in the market, as well as information regarding the expectations of future performance of assets (Muth, 1961). Hence, if there is information in the market on an impending boycott, this information will be reflected in the target firm’s current asset prices. Based on these discussions, we posit that: H1: Boycotts have a negative effect on the value of target firms. H2: Both boycott threats and actual boycotts have a negative impact on the value of the target firms. The effectiveness of boycotts and boycott threats lies in the organizers’ ability to sell the idea to other stakeholders in the target firm’s external environment. The more popular or reasonable the cause, the more likely it is to receive the sympathy and support of others and the greater its likelihood of affecting the target firm and its shareholders. To the extent the support for boycotts/boycott threats depends on the cause and not the sponsoring organization, it does not matter whether a boycott is called by an organized labor union or any other organized group. Hence, we can hypothesize that: H3: The impact of boycotts/boycott threats is independent of its sponsoring organization. Managing a firm is a dynamic process that requires managers to constantly juggle activities and factors that affect the value of the firm. Thus, the value of firms fluctuates constantly

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as management tries to capitalize on the positive aspects of some of the factors to compensate for the negative aspects of others, thus; H4: The impact of boycotts and threats of boycotts will have only a short-term effect on the value of the firm. We use the event study methodology to measure the financial impact of boycotts and threats of boycott.

Data Following Pruitt and Friedman (1986), we used the Wall Street Journal Index, The New York Times Index, and The Christian Science Monitor for news on actual boycotts and boycott threats that targeted publicly held firms and occurred between 1980 and 1993. We supplemented our efforts by searching business news abstracts for information on boycott and boycott threats that occurred within the stated time period and obtained information on a combined total of 502 actual boycotts and threats of boycott evenly spread over the period. Because a boycott action/threat in a populous region can more easily attract several sympathizers as opposed to one in a less populous region, indiscriminate use of boycott data may introduce the possibility of geographic or location bias. To eliminate this, we examined only events that were national in scope. Although using multiple sources for data (events) increases the sample size, it also introduces the possibility of double counting, hence we examined every event to avoid double counting. Furthermore, because news of a boycott or boycott threat has to be such that it can generate enough interest in the financial markets, we required that only firms traded on either AMEX or NYSE be included in the sample. Even though this requirement led to a reduction in the sample size to 106, it is nonetheless important because it eliminates or at least reduces size bias. Because all the firms traded on the AMEX and NYSE satisfied certain minimum financial requirements, they can all be considered to be in the same league. Finally, we screened the data to ensure that there were no confounding events, such as news of new products being introduced by the firm, and the hiring of the new CEO during the analysis period. Such events have been shown to cause reaction from the financial markets (see Chaney, Devinney, and Winer, 1988). We obtained information on daily stock returns from CRSP tapes (Center of Research in Security Prices, 1993). Our data size was further reduced to 54 during the parameter estimation process as some of the firms did not have trading data during the parameter estimation period. The 54 events consisted of 25 threats of boycott and 29 actual boycotts. Also, a further analysis of the 54 events shows that 15 of them were either endorsed or sponsored by a labor union while 39 were not. While concern could be expressed about what may first appear to be the small sample size, it is important to note

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that the requirements we used to pare down the sample size are reasonable and necessary. Furthermore, our total sample size of 54 is, by far, bigger than those used by previous studies on similar issues. For example, Pruitt and Friedman (1986) used a sample size of 21 events, and Pruitt, Wei, and White (1988) used 16.

Event Study Methodology The behavior of security prices is the underlying principle behind the event study methodology. The efficient market hypothesis (EMH) and the rational expectations hypothesis (REH) posit that asset prices reflect all the information available in the market at any given point in time (Fama, 1970; Muth, 1961). But current market assets are expected to produce income in future periods, hence the current market prices of assets represent the discounted value of the future streams of cash flows which will accrue to them. Thus, Pi,t 5

∞

d i,t1T

o T 1(11r 5

)T

(1)

i,t1 T

where i 5 individual asset, t 5 time, P i,t 5 price of asset i at time t, di,t 1T 5 the expected future stream of cash flow in period t 1 T, and ri,t 1T 5 the T-period discount rate. The discount rate is the opportunity cost of cash flow given the perceived risks associated with the asset. Returns on asset i at time t can be computed as Ri,t 5

(Pi,t 1 d i,t 2 Pi,t21) Pi,t2 1

(2)

where, Ri,t 5 P i,t 5 d i,t 5 P i,t21 5

return on asset i at time t, the current price of asset i at time t, dividends paid in period t, and last period’s market price of asset i.

The market model, however, posits that the expected return on any asset i in the market is linearly related to the contemporaneous return on the market portfolio and computed as R˜i,t 5 ai 1 biR˜m,t 1 e˜ i,t where Ri,t 5 random return on asset i ai and b i are parameters, Rm,t 5 the market portfolio, and ei,t 5 residuals. Thus, the market model becomes

(3)

E(R i,t,|φt 21Rmt) 5 ai 1 b iRmt

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(4)

This argument allows us to measure the impact of unanticipated firm-specific events; in this case, the impact of boycotts or threats of boycott. If the market believes that the boycott action will impair the firm’s ability to conduct business as usual then there will be significant negative abnormal returns (AR) (AR or CAR , 0). In other words, E(ei,t) ≠ 0. On the other hand, AR or CAR (cumulative abnormal returns) will not be significantly different from zero if the impact of boycott or boycott threats is negligible. The exact timing of when information regarding an event reaches the market is often problematic because of leakage of information prior to official announcements, hence CAR are used to capture leakage of information (see Fama, Fisher, Jensen, and Roll, 1969). Each firm’s excess returns are divided by the estimated standard deviation to correct for variance, and the ratio of the standardized excess returns becomes the test statistic for the event day. We estimate the parameters of Equation (3) using a linear regression over a period starting from 320 trading days to 21 trading days before t 5 0 and use the parameters to forecast expected returns for a period of 20 days prior to the event to 5 days after the event. We measure the impact of the event by subtracting the actual returns. As a precautionary measure, we keep the number of post-event days short to avoid other confounding events.

Empirical Results and Analysis First we calculate the cumulative abnormal returns for the entire sample which combined threats of boycott and actual boycotts (n 5 54) for 20 days prior to the event, and 5 days after the event; a total of 26 days. The results are provided in Table 1. We use the cumulative abnormal returns for our analyses because of reasons discussed earlier. Next, we calculate the cumulative abnormal returns for actual boycotts (n 5 19) using a similar event window, this computation allows us to test H1. The results are provided in Table 2. We calculate the cumulative abnormal returns for threats of boycotts (n 5 25) to test H2. The results are provided in Table 3. Using the two-sample mean test, we investigate the difference in the effects of actual boycotts and boycott threats using the abnormal returns on day t21. These results are reported in Table 4. Furthermore, using the abnormal returns of all the events on day t21, we test for difference in the mean abnormal returns of union-sponsored boycotts and nonunion sponsored boycotts (H3). The results are provided in Table 5. The results of our analyses did not only reject H1, but are surprising. They challenge the existing notions that boycott actions inflict severe financial penalty on target firms. In fact, the results show that actual boycotts and threats of boycott inflict no financial loss on targeted firms. Table 1 shows that cumulative abnormal returns within seven days of day t21 indicate no evidence of a significant wealth loss. On the contrary, the cumulative abnormal return on day t21, the day

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Table 1. Abnormal Returns, Cumulative Abnormal Returns, and Associated Z-Values for All Events

Table 2. Abnormal Returns, Cumulative Abnormal Returns, and Associated Z-Values for Actual Boycotts

Day a

AR

CAR

Z-Value

Daya

AR

CAR

Z-Value

220 219 218 217 216 215 214 213 212 211 210 29 28 27 26 25 24 23 22 21 0 1 2 3 4 5

20.00127 20.00198 0.00164 0.00184 20.00070 20.00164 20.00030 0.00035 0.00011 0.00182 20.00145 0.00097 20.00157 20.00011 20.00280 20.00065 20.00191 0.00060 20.00227 0.00659 20.00223 20.00094 20.00058 0.00367 0.00007 20.00110

20.00019 20.00217 20.00053 0.00131 0.00061 20.00103 20.00133 20.00098 20.00087 0.00095 20.00049 0.00047 20.00110 0.04777 20.00401 20.00466 20.00657 20.00650 20.00878 20.00219 20.00442 20.00535 20.00593 20.00226 20.00226 20.00329

20.95620 21.22945 1.14293 1.16173 20.55311 20.90902 20.48125 20.08218 20.30530 0.88853 20.38490 0.75417 20.36907 0.34774 21.68719 20.41277 21.01526 0.06870 20.65790 3.46891 21.21533 20.89889 20.29610 2.30519 0.09304 20.51012

220 219 218 217 216 215 214 213 212 211 210 29 28 27 26 25 24 23 22 21 0 1 2 3 4 5

20.00235 0.00018 0.00335 0.00232 20.00154 20.00446 0.00374 20.00132 20.00011 20.00102 0.00296 0.00197 0.00193 20.00076 20.00364 20.00121 0.00029 20.00169 20.00531 0.00760 20.00374 20.00161 20.00085 0.00463 20.00334 20.00264

20.00949 20.00931 20.00596 20.00364 20.00518 20.00965 20.00590 20.00722 20.00733 20.00834 20.00540 20.00342 20.00150 20.00226 20.00590 20.00710 20.00682 20.00851 20.01382 20.00621 20.00995 20.01156 20.01241 20.00778 20.01112 20.01376

21.07134 20.27167 1.18349 0.94879 20.80478 21.66057 1.16119 20.52985 20.46910 20.51368 0.78338 1.04734 1.08000 20.03739 21.68357 20.91816 0.11202 20.22944 21.67353 2.94686 21.39236 20.87787 20.44783 2.27397 21.67109 21.81241

Abbreviations: AR 5 abnormal returns, CAR 5 cumulative abnormal returns. a Period measured is 20 days prior to the event to 5 days after the event.

Abbreviations: AR 5 abnormal returns, CAR 5 cumulative abnormal returns. a Period measured is 20 days prior to the event to 5 days after the event.

that information on the boycott action or the threat of boycott hits the wires is 0.00659, which is significantly positive with a z-value of 3.469. This result means that, on average, targets of boycott/boycott threats actually experience wealth gains of approximately 0.66% when the information becomes public. One would expect abnormal returns to be negative if boycotts or boycott threats were effective in inflicting significant financial losses on the target firm. Similar results are evident in our analysis of actual boycotts (distinguished from threats of boycott) reported in Table 2. These results show that the cumulative abnormal return on day t21 is 0.00760 which is significantly positive with a z-value of 2.947. Again, this implies that, on average, firms which are targeted by actual boycott action (as distinguished from boycott threats) experience about 0.76% increase in returns when news of the boycott becomes public. Our analysis of threats of boycott shows that they also cause a significant positive reaction from the stock market on the day that the news becomes public (see Table 3). The cumulative abnormal returns on day t21 is 0.00545 with a z-value of 1.932. Even though the cumulative abnormal returns of actual boycotts on day t21 is larger than the cumulative abnormal returns caused by threats of boycott on the same day (0.00760 vs. 0.00545), a two-sample mean test reported in Table 4 indicates no significant statistical difference (t 5 0.08, and p 5 0.93). The results of these analyses

not only reject H2 but offer further proof that both actual boycott and boycott threats impact the value of the target. However, contrary to expectations their effect is positive instead of negative. These findings are at first startling. They not only challenge a long-held popular belief in the power of boycotts to exact financial penalty but also question the assertion made by boycott organizers on the power of boycotts. However, they support claims made by such firms as Nike that their sales were brisk and up from the previous year’s sales level by as much as 40% while being boycotted by the Reverend Jesse Jackson’s operation PUSH (Hayes and Pereira, 1990). Similarly, Anheuser-Busch indicated that sales increased by as much as 8% while being boycotted and at a time when the industry sales were declining (Garino, 1983). The Florida Citrus Growers’ Association also announced recently that their sales volume increased as of August 1994, even though the National Organization for Women (NOW) has as of March 10, 1994, made them a target of a national boycott for advertising on a conservative radio talk show hosted by Rush Limbaugh. A logical explanation of these results (Tables 1 and 2) is that the significant positive abnormal returns are due to the fact that boycott targets (firms) do not passively accept being boycotted or threatened with boycotts but rather taken measures to blunt the effect of boycotts or threats of boycott. It

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Table 3. Abnormal Returns, Cumulative Abnormal Returns, and Associated Z-Values of Threats of Boycotts Day a

AR

CAR

Z-Value

220 219 218 217 216 215 214 213 212 211 210 29 28 27 26 25 24 23 22 21 0 1 2 3 4 5

20.00007 20.00441 20.00027 0.00131 0.00024 0.00153 20.00483 0.00222 0.00035 0.00500 20.00637 20.00016 20.00055 0.00062 20.00185 20.00004 20.00436 0.00202 0.00113 0.00545 20.00053 0.00074 0.00459 0.00164 0.00506 20.00045

0.01159 0.00718 0.00691 0.00822 0.00846 0.00999 0.00516 0.00737 0.00773 0.01273 0.00636 0.00620 0.00070 0.00133 20.00052 20.00056 20.00492 20.00290 20.00177 0.00368 0.00315 0.00389 0.00848 0.01011 0.01518 0.01473

20.25844 21.50260 0.41164 0.68739 0.04635 0.43382 21.92960 0.44109 0.05192 1.83735 21.38947 20.01030 21.68034 0.54588 20.67486 0.37069 21.59679 0.34286 0.81317 1.93221 20.29601 20.28793 1.87645 0.45545 2.21022 0.07917

Abbreviations: AR 5 abnormal returns, CAR 5 cumulative abnormal returns. a Period measured is 20 days prior to the event to 5 days after the event.

appears from these results that the damage control measures are very effective. Furthermore, for many boycotts, there are opposite “buycotts” in which supporters of boycott targets and their sympathizers seek out goods made by the targets (Milbank, 1991). For example, when Estee Lauder became the target of a boycott of gun owners because the company donated money to Handgun Control, gun control advocates organized a “buycott” in which they encouraged consumers to buy the company’s products as a sign of solidarity. Hence, the lack of negative abnormal returns is an indication that such anti-boycott measures are successful. It is also plausible that boycotts/threats are unable to inflict financial losses on the target firms because of the unavailability of close product substitutes, making it difficult for sympathizers to actually refrain from dealing with the target. However, very few products in the “real world” enjoy such a status. An argument can be made that the successes of early boycotts may have actually contributed to their current ineffectiveness. Because they have become widespread, as reported by Hayes and Pereira (1990), their causes became confusing and sometimes contradictory. For example, in 1991, Kellogg Co. received a top rating from a non-profit watchdog, the Council on Economic Priorities, as one of the four most socially responsible companies, yet it was being boycotted while receiving this top rating because of its ties to South Africa.

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Table 4. Two-sample Mean Test for Equality of Abnormal Returns of Threats of Boycotts and Actual Boycotts and Actual Boycotts on Day T-1 Variable

Mean

Sample Size

SD

SE

Threats Actual

0.0055 0.0076

25 29

0.0142 0.0146

0.0029 0.0027

T

DF

p

Equal variance Unequal variance

20.55 20.55

52 50.9

0.5871 0.5870

F

NUM DF

DEN DF

p

1.01

28

24

0.49

Test for equality of variance

Similarly, in 1991, Procter and Gamble became a boycott target for being the largest marker of disposable diapers, even though it also received a top rating from the Council on Economic Priorities. These conflicting messages in which a firm is praised for being socially responsible while at the same time being condemned, unfortunately, seem to characterize many boycott actions in the 1980s and 1990s. It could explain why the results of our study which analyze boycott data from 1980 to 1992 differ from those of Pruitt and Friedman (1986) and Pruitt, Wei, and White (1988) which analyzed data from 1970 to 1980. With a mixed signal from groups that monitor the good citizenship and social responsibility of companies, consumers who are being courted to join the call to boycott become confused and fail to heed boycott calls. The results in Table 5 support H3, and show that the success or failure of boycott/threats is independent of sponsorship. The mean value of abnormal returns of union-sponsored boycotts/threats is 0.0056 and the mean value of the abnormal returns of non-union sponsored boycott/threats is 0.0060. Table 5. Two-sample Mean Test for Equality of Abnormal Returns of Union-sponsored Boycotts and Non-Union-Sponsored Boycotts on Day T-1 Variable

Mean

Sample Size

SD

SE

Non-union Union

0.0060 0.0056

39 15

0.0138 0.0155

0.0022 0.0040

T

DF

p

0.08 0.08

52 23.1

0.9336 0.9373

F

NUM DF

DEN DF

p

1.25

14

38

0.2794

Equal variance Unequal variance

Test for equality of variance

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These values, however, are not significantly different from each other at a 5 0.05. Overall, the fact that the level of significance of abnormal returns was not sustained after the day on which information on the boycott/threats hits the wires (t21), as evidenced in Tables 1, 2, and 3, suggest that there are no long-term financial impacts. Thus, H4 is supported. Our results are consistent with Friedman (1985) and supported by observations in the marketplace. First, it is in the interest of the target firms to settle boycotts quickly if boycotts inflict substantial financial losses. However, it is not uncommon to find boycotts that last for several years. For example, the boycott sponsored by the United Food Workers Union against Winn-Dixie lasted for two and one-half years (Wall Street Journal, 1980). Similarly, the Bakery, Confectionery and Tobacco Workers International Union has, for 30 years, been asking its member not to buy R. J. Reynolds Industries’ tobacco products because it feels that Reynolds is anti-union (Wall Street Journal, 1985). Second, reports from Nike and Anheuser-Busch indirectly make this point; because firms know that boycotts cause insignificant financial losses they can afford to ignore them. This point was underscored by Procter and Gamble’s chairman Edwin L. Artzt, who said in 1991 that his company will not appease boycotters by offering coffee free of El Salvador beans. Boycotters had been demanding that the company cancel its purchases of coffee from El Salvador because the purchases indirectly support the right-wing death squads (Stern, 1991). The absence of a “financial clout” to boycott suggests that firms which settle with boycotters do so for reasons other than financial; perhaps to avoid the negative publicity. It also suggests that firms could successfully counter the effects of boycott and boycott threats by mounting their own publicity campaigns as Anheuser-Busch did in 1983. At that time the Reverend Jesse Jackson had accused Anheuser-Busch of not hiring, promoting, or doing business with enough minority members. On behalf of PUSH, Jackson called for a boycott of Anheuser-Busch products until the company agreed to negotiate with him. However, Anheuser-Busch refused to negotiate and countered Jackson’s boycott by making sure that when Jackson toured Anheuser-Busch breweries urging a boycott, Wayman F. Smith III, Anheuser-Busch’s vice president who is also black, held a press conference defending his company’s record (see Garino, 1983).

Conclusion The results of our study show that the effects of actual boycotts are not significantly different from those of threats of boycott. Furthermore, boycotts and threats of boycott do not, on average, inflict any financial loss on the target firms. On the other hand, target firms on average experience wealth gain at the time that they are being targeted. Such gains, however, can be attributed to the fact that firms work hard to nullify the impact of actual boycotts or threats of boycott. Even though we did not find that actual boycotts and threats of boycott

P. S. Koku et al.

inflict financial losses on target firms, we are unable to conclude that they are ineffective as negotiating tools. Certainly, the negative public relations that they generate can exact their toll on the good citizenship of the target firms as well as result in negative publicity for them. To counter such effects, firms may have to unleash their own PR machines during boycotts. Although the lengthy duration of many boycotts questions the assertion that firms negotiate with boycotters to save their corporate image, it is noteworthy that not every boycott action enjoys the same level of sympathy from the public. It would seem that those with reasonable causes that resonate with the public will elicit sufficient public sympathy to merit a quick settlement, while those that do not enjoy large public sympathy are allowed to drag on for years, as in the case of Bakery, Confectionery and Tobacco Workers International Union and R. J. Reynolds Industries. Perhaps, the indirect lesson here is that, given the lack of evidence for the ability to inflict financial penalty on target firms, boycotters need to choose their issues as well as their targets carefully. A popular cause may generate widespread public sympathy and support.

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