agricultural policy analysis center - university of tennessee - 310 morgan hall - knoxville, tn...
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Agricultural Policy Analysis Center - University of Tennessee - 310 Morgan Hall - Knoxville, TN 37996-4519
www.agpolicy.org - phone: (865) 974-7407 - fax: (865) 974-7298
Tobacco Buyout: Tobacco Buyout:
Impacts on Impacts on ManufacturersManufacturers
42nd Tobacco Workers Conference
Charleston, South Carolina
January 17, 2006
AAPPAAPPCCAACCAA
Kelly TillerAgricultural Policy Analysis Center
The University of Tennessee
AAPP CCAA
Impacts on Manufacturers
• TTPP assessments
• Future Phase II obligations
• Domestic leaf cost savings
• Imported leaf cost savings
• Responsiveness to future market changes
Impacts on Manufacturers
• Tobacco manufacturer and importer assessments(-$10b)
• Domestic leaf cost savings (+$3.1b to $6.5b)
• Imported leaf cost savings (+?)– Savings for domestic leaf purchases for use in
international manufacturing operations (+?)
• Phase II payment savings (+$2.1b)
• Responsiveness to future market changes (+?)
• Net financial burden: 1.3¢ to 2.7¢ per pack
AAPP CCAA
Assessments
• Assessments authorized up to $10.14 billion FY2005 through FY2014
• Based on share of sales volume for 6 major tobacco product classes
• 158 product manufacturers and 666 product importers– Required to submit data regularly to enable CCC
to determine respective quarterly shares of product classes
• CCC to send quarterly assessment notices the 1st of March, June, September, and December– Assessments due in 30 days AAPP CCAA
Assessments
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ClassFY2005
Proportional Share
FY2005 Assessment
(mil $)
Cigarettes 96.331% $975.0
Cigars 2.783% $28.2
Snuff 0.539% $5.5
Roll-your-own 0.171% $1.7
Chewing 0.111% $1.1
Pipe 0.066% $0.7
Market Responsiveness
• Absent the federal tobacco program, U.S. tobacco industry can exert more control over the tobacco production sector– Mere existence of former program influenced
the incentive structure surrounding contracting
– Growers now have a much stronger incentive to quickly adjust production, curing, and market prep practices to meet customer demands
• Highly beneficial in the event of future FDA authority
AAPP CCAA
Measuring Mfgr Impacts
• Event study methodology– Predicated upon the efficient markets hypothesis– All available information is impounded in current
stock prices– The value of a firm changes as the result of
unexpected events that cause investors to revise estimates of future cash flows and/or risk
• Calculate a measure of “normal” returns
• Calculate “actual” returns around event dates
• Estimate abnormal returns, the difference between actual and normal returns AAPP CCAA
Methodology
• Pi,t = current price (value)
• di,t+k = expected future cash flow to firm i at time t+k
• r = discount rate
AAPP CCAA
1
,, )1(k
k
ktiti r
dP
Methodology
• Ri,t = stock returns
• Compare stock returns to a measure of “normal returns”
• Select event dates– Corresponding to tobacco buyout legislation progress– Lack of information about expected outcome
• Select firms– Tobacco product manufacturers with complete data
available on CRSP AAPP CCAA
1,
1,,,,
)(
ti
titititi P
PdPR
Methodology
• Rm,t = value-weighted return on a portfolio of all marketable securities at time t
• ei,t = error term for firm i at time t; expected value of zero; variance = σ2
ei
• Estimated over the period 200 trading days before the event to 11 days before the event
AAPP CCAA
titmiiti eRR ,,,
Methodology
• ARi,t = abnormal return for firm i at time t, equal to ei,t
AAPP CCAA
)( ,,, tmiititi RRAR
Companies Included
AAPP CCAA
Company
Total Assets (mil
$)
Sales (mil $)
Net Income (mil $)
EPS (diluted)
Altria / Philip Morris $101,648 $63,963 $9,416 $4.57
British American Tobacco
$33,867 $65,633 $387 $1.45
RJR / Reynolds American $14,428 $6,437 $688 $5.62
Imperial Tobacco Group $11,630 $5,485 $805 $2.21
Gallaher Group $7,867 $4,886 $556 $3.40
Loew’s CP $2,778 $3,348 $546 $3.15
U.S. Smokeless Tobacco $1,659 $1,789 $531 $3.23
Vector Group $536 $323 $7 $0.10
Star Scientific $70 $31 -$17 -$0.28
Event Dates
• June 14, 2004– Buyout added to H.R.4520, vote in House W&M Committee– No FDA, funded by part of tobacco excise tax (public $)
• July 15, 2004– JOBS bill passed Senate vote with a buyout intact– Included FDA, funded by tobacco manufacturers
• October 6, 2004– H.R. 4520 reported out of conference committee WITH the
buyout
• October 22, 2004– President signs JOBS bill, prior to election
• December 23, 2004– Judge rules in favor of cigarette manufacturers on 2004
Phase II payment questionAAPP CCAA
Cumulative Abnormal Returns
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Event Dates
Average Cumulative Abnormal
Return
Z-Statistic
House Passage (6/14/04) 0.0083 0.5864
Senate Passage (7/15/04) 0.0036 0.2655
Conference Report (10/6/04) -0.0176 -1.3993
Signed into Law (10/22/04) 1.0019 0.1478
Phase II Ruling (12/2304) 1.0071 1.5717
Cumulative Across All Dates 0.000634 0.1085
Summary & Conclusions
• No evidence that the buyout negatively affected tobacco product manufacturers
• Cumulative impact on expected returns was positive, 0.0006%, not statistically significant– Passage of conference report had a negative
impact, -0.02%, significant at 10%
– Phase II ruling was statistically significant, positive impact, 1.01%
• Weak evidence that non-market benefits of terminating the tobacco program outweighed net economic costs to manufacturers
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Summary & Conclusions
• Hypothesized that individual firms may be affected differently across event dates– No statistical evidence found
• The overall legislation (corporate tax overhaul) affects some multinational firms simultaneously in multiple ways
• May consider alternative event sets– Excluding signing bill into law
– Pulling out Phase II ruling and doing a separate event study on Phase II impacts
AAPP CCAA
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