Does the court of public opinion influence stock price?
Public shaming of giant corporations has become a go-to tool for some politicians looking to drive an agenda. We’ve all seen the parade of high-profile CEOs, from the likes of Apple and Starbucks, testifying before U.S. congressional panels and E.U. competition authorities about their tax practices. Public relations agencies have even reported a huge influx of new crisis communications work from companies that fear becoming the target of a late-night tweet from the president. It’s almost becoming commonplace for CEOs to take their turn marching through the town square as the bell chimes: “Shame. Shame. Shame.”
But does it work? Do these high profile airings of grievances have a significant effect on stock price or sales? Sometimes.
But the bigger impact appears to be political, with the politicians behind these initiatives gaining a legislative edge and, in some cases, with corporate behavior changing to avoid future negative publicity.
That’s the major finding of a new working paper from a trio of professors, Jeff Hoopes, Leslie Robinson, and Joel Slemrod, representing the Kenan-Flagler Business School at the University of North Carolina, Tuck School of Business at Dartmouth, and the University of Michigan, which examines the effects of a large-scale public disclosure of corporate tax information in Australia. The group focused on Australia because the country passed a law in 2013 called the Tax Laws Amendment Bill, which allowed the Australian Tax Office to publicly release corporate tax information that had previously only been available to the taxation office.
That meant detailed tax information on over 1,800 companies was disclosed to the public on two separate dates, creating a unique scenario in which a groundswell of news reports and public scrutiny were focused on whether or not companies were paying their “fair share” of taxes.
I was recently able to speak with one of the authors, Tuck associate professor Leslie Robinson, about the study, and get some insight on what her findings might signal for big businesses that find themselves on the receiving end of this kind of unwanted attention.
Perhaps the best news from Robinson’s study for the CEOs and CFOs reading this is that neither consumer sentiment nor stock price were significantly impacted by the public disclosure, even when it revealed that the companies were paying very little in taxes. But, that doesn’t mean there was no impact at all.
There was some short-term negative sentiment toward private companies that were subject to disclosure – likely as a consequence of media coverage surrounding the event – but public companies appeared to escape largely unscathed. Stock prices did dip slightly for the public companies in the study in the period leading up to and surrounding the disclosure event, suggesting that investors perceive that being subject to disclosure will have at least some cost. But none of the observed costs appeared to be large.
How should business leaders interpret that?
“What’s unique about this Australian case is that the disclosure was made for hundreds of companies simultaneously, as opposed to one or two or three companies,” Robinson explained.
“I think part of the lack of significant consumer or investor backlash is because people think: ‘Oh, well 900 of those 1,850 aren’t paying tax in Australia. That just must be normal.’ No one is held out as an outlier for behaving badly… When you shame 900 companies at the same time, they don’t look as bad as when you single out one or two.”
In fact, Robinson and her co-authors contrast this relatively muted response with the notably more significant dip in negative consumer sentiment that accompanied the 2012 claims of tax avoidance directed at Starbucks in the U.K. In that case, the Starbucks Buzz Score, which is a metric used to capture negative brand sentiment, declined sharply around three key dates during the episode. Nearly a year later, the brand’s Buzz Score had still not recovered completely.
Still, even a cursory glance at a Starbucks stock chart – which is up roughly 120% since 2012 – or a look at the lines out the door to taste the new Sangria Red Tea, will tell you that even when a company is singled out, it takes more than a public airing of a company’s tax laundry to have a major impact on consumer demand.
The real impact of all of this scrutiny of corporate tax strategy, according to Robinson, is in the political theater.
“What we found was that different tax activists groups, labor unions, and some politicians were using this tax disclosure information to assert their view in the press. The thing that was always in the headlines was this theme that ‘X hundred firms in Australia pay no tax.’ Even though, if you look closely, something like 85% of those companies had no income and it was impossible to tell from the disclosure whether the lack of income was related to economic performance or something of interest to the taxing authority, such as income shifting out of Australia. Still, that headline was used in a number of different contexts to help stir the debate and catalyze a movement toward change.”
In the end, Robinson thinks that was really the point of the legislation in the first place.
“Our thinking now is that this legislation was never really intended to provide more transparency. It was to create the platform from which one could promote corporate tax change in Australia. The Australian Tax Office needed that platform of ‘X hundred firms don’t pay tax in Australia’ to make people angry and excited to affect change.”
On that front, there appears to be at least some inkling of changes to come.
“As of March of this year, 74 firms – including 9 that weren’t even on the original disclosure list – had agreed to adopt a new Voluntary Tax Transparency Code, whereby companies would publicly disclose their tax information. It would have been a lot harder to get companies to comply with that code had they not first publicly disclosed their tax information. In a way, the large scale public disclosure indirectly got companies to voluntarily provide more disclosure going forward as a means of protecting themselves.”
So, while the drama surrounding these high profile disclosures of once private information is not a death knell for consumer sentiment or a major drag on stock performance, it did have some effect. And, even if it is not necessarily an economically efficient way to spur political changes, as long as legislators and tax authorities can provoke a corporate response and spark an agenda by calling out big companies, the strategy is sure to be a fixture for the foreseeable future.
This article also appeared on Forbes.