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Thursday, April 12, 2007

WAL-MART: STOCK PRICE AND LIVING WAGES

I recently argued in the Blog that if Wal-Mart reduced their net profit margin by 0.27%, they could raise wages by $2/hour with a marginal effect on stockholders because most buy and hold. My Blog colleague commented that it was traders that would transform that marginal effect into major by rabble rousing the market about the company missing earnings goals.

I think it is important to pursue clarity on this process. Let’s start with the standard financial theory axiom that markets are fairly efficient – meaning stock prices reflect all available information given to the market. Traders then impound this information into prices. If Wal-Mart just raises wages for no reason, the stock price has to go down because this will negatively impact earnings and future earnings are a determinant of today’s stock price. While many investors buy and hold, I agree with my colleague that there are enough shares traded each day to have a considerable impact on the stock price.

Wal-Mart could argue that raising wages could actually help their bottom line, though. The reason is that this move may get politicians, advocacy groups, etc. off of their back and they would have to spend less money fighting them off and trying to defend themselves. If this is the case, Wal-Mart needs to spell this information out to the market and the true impact will be priced accordingly by traders in the market.

In a classic study (Rendleman, et. al, “Empirical Anomalies Based on Unexpected Earnings and the Importance of Risk Adjustments,” Journal of Financial Economics 10 (1982), it was shown that issuing earnings, without providing clear information why, tends to cause lingering effects on the stock price. This study segregated stocks based on earning surprises (ten deciles). Stocks which experience positive earning surprises tend to drift upwards after the announcement and stocks which experience negative earning surprises tend to drift downwards. Therefore, if Wal-Mart uses its PR juggernaut to prepare the market for a policy change that involves earnings adjustments thereby avoiding surprises, downward drifts can be minimal or non existent depriving management and stockholders with a justification for not paying its employees a living wage.

3 Comments:

Blogger KISSWeb said...

Isn't it intuitive that a sudden or rapid increase in pay from, say, $16,000 to $20,000 -- especially if the other family wage-earner can get something similar) will pay great dividends (figuratively, maybe more literally, too) in higher worker morale and better productivity? It's a lot easier to encourage smiling at the customer after you've given out a big raise.

5:37 PM  
Blogger ChiTom said...

Excellent! Thank you (both)-- always more to learn. I favor the raises, but wanted to see why and how Wal-Mart might be persuaded of reasonable corporate self-interest.

10:12 PM  
Anonymous Anonymous said...

There are proven benefits in providing fair compensation as illustrated by Cosco which pays substantially higher wages than Wal-Mart but is more profitable as noted by this author in the Blog at the end of last year.

12:06 AM  

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