Shareholder Perks and Firm Value

Jonathan M. Karpoff is Professor of Finance at University of Washington Foster School of Business; Robert Schonlau is Associate Professor of Finance and Real Estate at Colorado State University College of Business; and Katsushi Suzuki is Professor of Business Administration at Hitotsubashi University. This post is based on their recent paper, forthcoming in Review of Financial Studies. Related research from the Program on Corporate Governance includes Learning and the Disappearing Association between Governance and Returns, by Lucian Bebchuk, Alma Cohen, and Charles C.Y. Wang (discussed on the Forum here); and What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen, and Allen Ferrell.

Shareholder perks are in-kind gifts or purchase discounts made available to shareholders that do not scale proportionately with the number of shares held. Shareholders of Ford Motor Company, for example, receive “friends and neighbors” purchase discounts on the purchase of Ford automobiles, and Willamette Valley Vineyards shareholders receive discounts on wine. In our sample of Japanese firms, Sony Corporation sends discount coupons for its products to shareholders with 100 or more shares, Yamaha Corporation offers shareholders a choice of a discount on a purchase or a gift item every year, and Suzuki Motor Corporation annually sends shareholders with 100 or more shares an assortment of premium honey and rock salt.

Theoretical arguments can be made that shareholder perks increase firm value, decrease firm value, or are inconsequential. We articulate and test these competing views using data from Japanese firms. We begin by documenting that the initiation of a perk program is associated with an increase in firm value. The announcement that a firm will initiate a perk program is associated with a 3-day average abnormal stock return of 2.06%. In longer-horizon difference-in-difference (DiD) tests, perk-initiating firms experience positive and significant increases in their market value of equity after the perk program begins. These results indicate that perks are consequential for firm value.

Next, we examine four channels by which perks can increase firm value. Consistent with a share liquidity channel, we find that perk initiations are associated with an increase in retail share ownership and a decrease in share illiquidity. Consistent with a cost of equity channel, perk-initiating firms experience decreases in Merton’s shadow cost of equity and the cost of equity capital. And consistent with a signaling channel, the announcement of a perk program is associated with a positive stock price reaction that is correlated with the cost of the perk program. Similar to signaling with cash dividends, perk initiation is associated with decreases in the volatilities of stock returns and operating cash flow. Also like cash dividends, perk programs tend to be persistent once initiated and are accompanied by negative announcement returns when they are suspended.

We find only mixed support for a fourth possible channel, that perks increase firm value by advertising the firm’s products to consumers. Consistent with this channel, perk initiations are associated with an increase in firm sales. This result, however, is not robust in all test specifications. We also do not observe an increase in sales among firms that use their own products as perks, which are the most likely candidates for an advertising-to-consumers channel.

Firms that suspend a preexisting perk program have outcomes that are the opposite of perk initiation. The announcement that a firm will suspend a perk program is associated with a significantly negative abnormal stock return of –5.89%. Perk-suspending firms also experience a decrease in longer-term measures of the market value of equity, a decrease in the number of retail investors, an increase in share illiquidity, an increase in the shadow cost of equity capital, and a decrease in sales. The finding that perk suspensions generate the opposite outcomes as perk initiations provides further support for the inference that perks affect firm value via increased share liquidity, a lower cost of capital, signaling, and (possibly) advertising to consumers.

We employ several strategies to isolate treatment from selection effects, including event study tests, long-horizon DiD tests, panel data analyses, and a series of robustness tests. Because perk programs are an endogenous corporate policy choice, however, we cannot rule out all possible selection effects. For example, we find that perk adopters have low retail share ownership, suggesting that managers adopt perk programs when they think the firm’s retail share ownership is too low. We therefore do not infer that perk programs would create value for all firms. Rather, perks appear to be optimal for some firms, for which the benefits of perk initiation—which can include increased share liquidity, a lower cost of capital, signaling to investors, and (possibly) increased sales—exceed the costs. Together, these results indicate that optimal ownership structure does not follow a one-size-fits-all model, and that some firms benefit by catering to small shareholders.

The complete paper is available for download here.

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