PHASE I -- QUESTION 6
The chart below shows the historical stock price of three companies over time. The corporate performance is compared to the Dow Jones industry average and to the S&P 500 Index. You can obtain this information at http://moneycentral.msn.com/investor/home.asp for almost any company that is currently trading stock in the securities market. In this example, I randomly picked three companies, including Adelphia Communications Corporation. Notice its stock performance during 1999. You should be able to find news reports about Adelphia around November 2000 and January 2002. What happened? Notice that the stock price for McDonalds Corporation also dipped around January 2003. What news event(s) caused stock prices for McDonalds and Costco to drop around January 2003? Do you think executives are concerned about the changes in stock price? Why or why not?
posted by Dr. Scott @ 9/06/2005 11:40:00 AM
23 comments
23 Comments:
Securities Exchange Commission
-against-
Adelphia Communications Corporation
This case involves some of the most financial fraud ever in a public company. Adelphia Communications Corporation (the nation's 6th largest cable company) excluded billions of dollars from balance sheets and financial statements as well as inflationg their earnings to meet Wall Street's expectations. Between mid-1999 and 2001 Adelphia excluded over $2.3 billion in its bank debt from its company's annual and quarterly financial statements by systematically recording those liabilities on the books of unconsolidated affiliates. This exclusion of financial information violated GAAP and also misled the public about these liabilities in statements and Commission filing. Additionally, during the same time period, Adelphia misstated the number of cable suscribers, the extent of its cable plant to upgrade, and lastly the net income and earnings before taxes, interest, and depreciation.
In August 2003, a suit filed by the parents of two girls claimed that McDonald's and two of its restaurants in the Bronx failed to disclose clearly the ingredients and effects of its food, much of which is high in fat, salt, sugar and cholesterol. The two girls ate McDonald's food frequently and in result gained a lot of weight. This legal action is the first of its kind against a fastfood chain in a U.S. courtroom.
Of course executives are concerned with any changes in the stock price that may lower the net worth of stock and lower prices of the stock. A reduction in stock prices and in stock itself, could be a result of either an economic period of hardship, scandals, strikes, low consumer purchases, ect., which are all hardships a company may face which results in the decrease in stock price, and thus a loss of money will incur. So, executives are constantly monitoring the status of their stock and hope their stock will rise and never recede, as when stocks rise, this means that their business is continuing to succeed and prosper.
According to Forbes.com, the founders of Adelphia Communications, the Rigas family, “collected $3.1 billion in off-balance-sheet loans backed by Adelphia.” They overstated the outcome by inflating capital expenses and hiding the existing debt. By engaging in such extensive fraudulent activities, the company and its stock suffered a downfall. (Forbes, 26 August 2002; http://www.forbes.com/home/2002/07/25/accountingtracker.html)
McDonald’s posted its first quarterly loss in its history as a growing, prosperous fast food chain. Due to a decline in sales, it began to face the possibility of a rickety future. In addition to the lack of burger cravings, the damaging outlook in the UK caused by the McLibel trial, and its criticism from anti-American and anti-capitalists for its global expansion strategy, McDonald’s is threatened by the growing awareness of the obesity issue. This issue is especially apparent in the United States. Many people were becoming more aware of the unhealthy status of fast food restaurants at the point right before the stock dropped, and, like Jenna mentioned, several overweight consumers engaged in lawsuits against McDonald’s, holding the restaurant responsible for their weight and health problems. (Foodservice.com, 8 January 2003; http://www.foodservice.com/news/company_news_detail.cfm?id=5630&company_name=McDonald's)
As stated in the textbook, Financial Accounting Tools for Decision Making, Costco’s stock price fell by 25% when it missed its estimated earnings per share figure by 1 percent. In agreement with Rickwood’s comment, executives are definitely going to take all these previous situations into account when buying and selling stock and as they observe the progression within the stock market. Both internal and external users of accounting information take into account significant events that occur within the economy or behind the scenes within a company when considering buying or selling stock. Events such as fraudulent behavior will cause executives to lose money, not gain it. Therefore, stock price is very important to executives and their businesses.
sorry, i was referring to question 6 of phase 1 in my previous post. not question 1. thanks!
sorry, please disregard the previous post, i meant it to go with one of my different comments.
Another possibility for the dramatic fall in stock prices for the McDonalds Coorporation in January 2003 may be as a result of a controversy/ scandal that which involved vegetarians who sued McDonald's for not revealing that their "vegetarian" French fries actually contained beef. The vegetarian plaintiffs alleged the burger chain concealed the presence of beef product in what McDonald's had promoted as being meat-free French fries. This was a major controversy and led to a ten million doller law suit.
February 12, 2003 http://eatthestate.org/07-12/CostcologicalCatastrophe.htm
Costco catches a wave a of bad media attention from attempting to open up a new store in Mexico by attempting to construct it on historically significant land. The land was purchased at auction from the government and with their blessing for the hopes of new jobs. But the locals only see the destruction of their park and instead of construction beginning it has been delayed, allowing the land to sit barren and scarred. This allows the locals and the media to showcase the destruction of this "heartless" megastore.
On top of this the store had recently increased many of it's prices, making this bargain store, not such a bargain anymore. With rising prices and bad media attention speculation arrises as to what their companies stock should be purchased at, and it is certainly below their current price. http://www.businessweek.com/bwdaily /dnflash/jan2 003/nf20030129_6835.htm
In January of 2003, Pres. Bush wanted to strengthen small business and wanted to add a Growth and Jobs package that will help employees and small businesses. McDonalds stock, being a humungous business, went down the drain. The following year, a movie called "Supersized Me" came out in theaters. It is a documentary about a man who ate McDonalds 3 meals a day for 2 weeks(I'm not sure of that this is correct). He went to the doctor to check how he was doing. He gained a lot of weight but not enough to be obese. He had some heart and kidney problems. There was also a scandal that a women had ordered a cup of very hot coffee and spilled it. She sued McDonalds. Once the public heard the news, the sales and stock of McDonalds plummeted because people didn't want to eat McDonalds or any fast food anymore.
Of course, Executives are going to be concerned about the changes in stock prices. They are the ones in charge of the whole corporation. They want the business to have a net profit and to have the business running smoothly.
It was inevitable that these corporations suffered from severe declines in stock price after the events that occurred. By losing the public’s trust after its scandalous event in 1999, it’s going to be extremely difficult for Adelphia to regain power and status in such a competitive market. It lost its reputation capital, and lost its spot on the road to being a successful company. Consumers will not forgive and forget such an event. In the McDonalds situation, even though it is the fault of the consumer that he/she suffered from health problems because he/she ate so much of the fast food (with no one forcing him/her to do so), the media brought the spotlight to the restaurant, publicizing the issue. After hearing about the lawsuits that the fast-food chain was experiencing, in addition to the new dieting fad and the “Supersize Me” movie, people simply began putting things in perspective. The food served at McDonalds is not healthy. Such realizations will cause consumers to stop eating at McDonalds as often as they did before. To avoid similar accusations in the future, McDonalds started adding healthier choices to their menus and taking more precautions. The large corporation began to bounce back into the competition after much of the ridiculous accusations settled down. Costco, according to Nick Satinover, built on historically significant land and raised product prices; therefore, it lost customers as a result. However, this situation was not as dramatic as that of Adelphia’s; and Costco, like McDonalds, proved that it was capable of maintaining a respectable position against its competitors.
Concerning McDonalds, looking at some financial statistics as presented by Jeff Fischer on Fool.com (http://www.fool.com/dripport/2003/dripport030102.htm), it almost seems as if McDonalds was destined to take a plunge in the stock market. Leading up to 2003, the financial numbers had not been in their favor. Fischer has pointed out a number of things, including how their free cash flow has been dropping in big numbers over the years. Also, according to reports, the cash conversion cycle of McDonald's has weakened greatly as well. Also, factor in that their debt had risen to $9.4 billion in September 2002, compared to their $423 million in assets available at the time. While McDonalds sales had risen 30% from 1997 to 2001, their operating expenses had risen greater than that, growing 42%. Debt had greatly piled up. By the time 2003 had rolled around, it would have been more than a wise choice not to invest in McDonalds. Then with all the scandals and controversies taking place in the following years, with various lawsuits being filed against them, McDonalds rapidly began to lose more of what little they had to begin with, and also lost future profits at the same time. With little money to do more new advertising, McDonalds continued to suffer while other food businesses have taken advantage of the oppurtunity and moved along in the shift towards more "healthy" choices. Even McDonalds now has been forced to do this, as you may have noticed in more recent ads. They involve the change in the menus and choices offered, which they are surely feeling right now in their financial accounts, as change does cost money. There is more competition than ever before, and McDonalds has less to work with now. McDonalds is nowhere near its peak, and its no surprise that its stock have dropped.
In my opinion, executives are very concerned with the changes in stock price becuase of something discussed in the "Bigger than Enron" video, called stock options. Stock options are credit for stock given in large quantities to exectutives of corperations in order to create incentives for them to make the company more profitable. For Mcdonalds, Matthew H. Paull is the Corporate Executive, Vice President and Chief Financial Officer. In 2003, he recived 120,000 in underlying stock options. If Mcdonland's stock was higer in 2003, Paull would have recived more money. Like everyone, corparte executives care about making money.
http://sec.edgar-online.com/2004/04/08/0001193125-04-059171/section11.asp
Executives are definitly concerned about price changes in stocks. After all they are holding their money in these companies in hopes of making a profit not a loss. When these stockholders see problems, they may feel that the company has begun a downward spiral, like the Adelphia corporation did. All of the stockholders are not going to withdraw their ownership of stock, but there are ones who do not want to take a risk of the company having more problems. Therefore you will see a small drop in stock. However, most of the public will forget about small mishaps, depending whether or not the company takes enough action to save its capital reputation. If this is accomplished, the stock will climb back up instead of down.
In am writing in responce to Transam's post about the fluxuation of stock prices, specificly small decreases in stock prices such as Adelphia. I belive that more often than not, larger dips in stock prices of companies with problems will occur than small ones. The reason for the sheepishnes of investors in dicussed in the book "The Lexus and the Olive Tree: Understanding Globalization" by Thomas L. Friedman in which Friedman uses the term "electronic heard" to describe both foriegn and domestic investors, acting as sheep, following other investors action. According to Friedman, once one investor sells thier stock this sends a strong signal to other investors to do the same. After a giant selling of stock, the price of the stock falls. Friedman pridicts that even small problems in company can trigger these events like those which cause a decrease in the value of Adelphia stock.
Executives have to be very concerned with changes in stock prices. Normally CEO's are put in place by a board of stock holders. They are the ones who are planning on making money off of the stock. The CEO is paid by the company to manage and earn a profit. They are not the investors so they are not worried first hand normally on making money off of the stock. They need the stock to make money for the sake of their job. So of course they are concerned with stock price fluctuation but not for first hand reasons. John Rigas had no care for the stock price or his job for that matter so he is not a good example of a CEO trying to do a good job of increasing stock price.
In response to Kupelnick's feeling on the tendency for stock prices to drop largely, There are many companies that show a small dip in their stock price, but eventually rebound. Whether that drop be 10% or 50%, that can still be considered small. It is true that the stock may never rebound, like Adelphia's stock did, but there are many companies that do show small dips in stock due to distaste among the public, which these companies eventually overcome. McDonalds has shown "small" drops, Exxon has seen drops in its stock when the Exxon Valdez spill occurred, When a 4 year old boy died on the Mission Space ride on June 14, 2005, the stock plummeted from 27.70 to 24.50, but within a month was back up to 26.50, and will more than likely rise back up next year when their season peaks.
http://www.answers.com/topic/the-walt-disney-company
Another issue I discovered about McDonald's 8-year stock low in January of 2003 were bad reports from the credit agency Fitch of McDonald's debt ratings; they claimed McDonald's would not recover prior to 2004. They alarmed investors that McDonald's was not putting in enough effort to recover their business, and other fast food restaurants were over-shooting them. Although McDonalds was trying to improve their business (dollar menu, quality, remodeling) it takes about a year for those efforts to have an impact. McDonalds, although then still reigned king of the burger industry, had to overcome their negative shadow and regain trust of their investors.
I edited this blog but accidently posted it on Question 4, so read that one instead!
Many events triggered the stock prices for McDonalds to drop as mentioned by all the other blogs. However another event that also was a big reason as to why the stock prices dropped was because of the sudden trend in health issues. Other competing fast food chains such as Wendy's offered healthier meal options. The executives were most likely extremely concerned with the large drop in stock prices because they lose money when stock prices drop. It means that they are doing something wrong, and it needs to be fixed. That is why I believe McDonalds started to offer freshly tossed salads. Through this, hopefully the investors will regain the trust that they once had, and the stock prices will rise - causing the McDonalds stock to be more valuable.
In addition to Sam Kupelnick's comment about stock options, executives decide when to disclose information to investors. They pick a time that benefits them the most. If they report bad news right before their award date arrives, the stock price is likely to go down and they will receive a larger sum of money later, and all is well assuming stocks continue to go up after they reveal their good information. Greedy executives are very concerned about themselves, and therefore about changes in stock prices.
http://www.gsb.stanford.edu/news/research/compensation_stock.shtml
In 2002 Adelphia and the Rigas family, who owns this cable company were charged by the SEC for financial fraud. http://www.sec.gov/news/press/2002-110.htm There were three main reasons for the charges "left billions of dollars off of financial statements (2) they inflated earnings to meet the wall steets quota (3) and finally, the did not disclose the purchase of several luxury homes that the rigas family purchased."
i agree with transam and the rebounding of stocks, it's very typical for stock prices to fluctuant on a monthly, weekly, daily, even hourly rate. Nearly every company to ever issue stocks has had their prices slump for a period of time, but a well founded company usually rebounds so long as a market still exists for their product or service.
Post a Comment
<< Home