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Intellect

BYU study: Stock prices drop when protests make headlines

One Friday in April 2006, a group of Mohawk Indians blocked freight trains in southern Ontario as an act of protest over a centuries-old land dispute.

Editors at The New York Times gave the story 13 paragraphs of print and the railway’s stock price dropped 5.8 percent below the expected return by the end of trading the next Monday.

This situation illustrates the findings of new research by a Brigham Young University sociologist, who concludes news coverage of protests aimed at publicly-traded companies directly impacts their performance on Wall Street.

The study found just how far a stock’s price declines from a protest depends on editorial decisions about how much attention a story is given. An analysis of 342 protests covered by The New York Times revealed that stocks of targeted companies declined one-tenth of a percent for every paragraph printed about it in the newspaper.

The influence of media coverage stands in contrast to other factors that proved unrelated to stock price. For example, the researchers expected the size of the protest to matter – that protests with more people and sponsoring organizations would lead to greater declines. The researchers also expected boycotts to be a more effective form of protest. In both cases they found no effect.

“The discontented ‘little guy’ can have an effect in a big way, just not through the traditional thinking about social movements,” said BYU professor Brayden King, lead author on the study. “The best weapon he can wield is the media giving the story a lot of space.”

King and co-author Sarah Soule of Cornell University conducted their analysis using protests that took place during a period of 28 years. The protests, on average, caused a drop in stock price of 0.4 to 1.0 percent, most of that happening on the day of the protest and the day after. King said that amounts to 70 percent of the negative shock corporate acquisitions make on stock price, the topic of his Ph.D. dissertation at the University of Arizona.

“We’re talking about millions of dollars of capital being transferred out or lost,” King said.

The study, to be published in the upcoming issue of Administrative Science Quarterly, showed the damage can be much worse for businesses not normally in the media spotlight, especially when the protest involves labor or consumer issues.

“Part of what makes a protest work for activists is that investors aren’t necessarily expecting it,” King said. “Protests present investors with new information about a corporation.”

The researchers point to the ineffectiveness of boycotts as evidence that investors reactions are driven by information and not immediate financial threats presented by a protest.

“Boycotts are purposefully meant to take revenue away from a company, but boycotts don’t seem to make a protest more effective,” King said. “That tells me that investors’ reactions to protests have more to do with perceptions or information than immediate financial damage.”

According to King, one anonymous reviewer of the study expressed surprise that coverage by The New York Times would impact stock price, presuming that brokers pay more attention to news in The Wall Street Journal.

“If anything, that would suggest protests covered by The Wall Street Journal would produce even larger declines,” King said. “We chose to study events from the archives of The New York Times simply because it provided a bigger record of national protests.”

Writer: Marissa Ballantyne

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Photo by Mark A. Philbrick/BYU Photo

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