the case of royal ahold

Journal of Accounting and Public Policy 26 (2007) 328–375 www.elsevier.com/locate/jaccpubpol Investor relations, reputational bonding, and corporate governance:
The case of Royal Ahold
Abe de Jong a, Douglas V. DeJong b,*, Gerard Mertens a,
Peter Roosenboom a b a
Department of Financial Management, RSM Erasmus University, Netherlands
Tippie College of Business, University of Iowa, Iowa City, IA 52242, United States

Abstract
Royal Ahold (Koninklijke Ahold NV) was one of the major success stories in the
1990s and is one of the major failures, suffering a complete meltdown, in 2003. We investigate the strategy, investor relations, accounting transparency and corporate governance of Ahold; these elements jointly drive the firm’s performance over the past decade. Investor relations and its implications are an important but under researched aspect of the market’s belief formation process. For Ahold, investor relations is an important component of reputational bonding [Siegel, J., 2005. Can foreign firms bond themselves effectively by renting US securities laws? Journal of Financial Economics 75,
319–359]. Our clinical study documents investor relations’ influence on investor expectations. We then provide an in-depth analysis of the strategy, accounting transparency and corporate governance that lead to Ahold’s downfall. We provide insights and implications into these relationships that present theory and empirical studies have not fully addressed. Ó 2007 Elsevier Inc. All rights reserved.
*

Corresponding author. Tel.: [phone]; fax: [phone].
E-mail addresses: [e-mail] (A. de Jong), [e-mail] (D.V. DeJong), [e-mail] (G. Mertens), [e-mail] (P. Roosenboom).
0278-4254/$ - see front matter Ó 2007 Elsevier Inc. All rights reserved. doi:10.1016/j.jaccpubpol.2007.03.002 A. de Jong et al. / Journal of Accounting and Public Policy 26 (2007) 328–375

329

JEL classification: F36; G38; K22; M40

References: Amburgey, T., Dacin, T., 1994. As the left foot follows the right? The dynamics of strategic and structural change Barth, M., Clinch, G., Shibano, T., 1999. International accounting harmonization and global equity markets Bebchuk, L., 1999. A rent-protection theory of corporate ownership and control. NBER Working Paper No Benston, G., Hartgraves, A., 2002. Enron: What happened and what can we learn from it. Journal of Accounting and Public Policy 21, 105–127. Bickerton, I., November 29, 2005. Ahold settles US lawsuit for dollars 1.1 bn, Financial Times (London Edition), 30. Bradshaw, M., Bushee, B., Miller, G., 2004. Accounting choice, home bias, and US investment in non-US firms Brennan, M., Tamarowski, C., 2000. Investor relations, liquidity and stock prices. Journal of Applied Corporate Finance 12, 26–37. Bushee, B., Miller, G., 2005. Investor relations, firm visibility and investor following. Working Paper, Harvard Business School. Cadbury Committee, 1992. The Financial Aspects of Corporate Governance. Burgess Science Press, London. Chevalier, J., 1995a. Capital structure and product-market competition: Empirical evidence from the supermarket industry Chevalier, J., 1995b. Do LBO supermarkets charge more? An empirical analysis of the effects of LBO’s on supermarket pricing Coffee, J., 2002. Racing towards the top? The impact of cross-listing and stock market competition on international corporate governance Coglianese, C., Keating, E., Michael, M., Healey, T., 2004. The role of government in corporate governance Coriolis Research, 2001. Retail Supermarket Globalization: Who’s Winning? Coriolis Research, Auckland. Danko, Q., 2003. Talmende toezichthouders. Intermediair 24 (June 12), 34–37. De Jager, J., 1995. Arm en Rijk kunnen bij mij hun Inkopen doen; De Geschiedenis van Albert Heijn en Koninklijke Ahold De Jager, J., 1997. Albert Heijn; De Memoires van een Optimist. De Prom, Baarn. De Jong, A., Roell, A., 2005. Financing and control in the Netherlands: An historical perspective. DeJong, D., Forsythe, R., Lundholm, R., 1985. Ripoffs, lemons and reputation formation in agency relationships: A laboratory market study De Jong, A., DeJong, D., Mertens, G., Wasley, C., 2005. The role of self-regulation in corporate governance: Evidence and implications from the Netherlands Diamond, D., 1991. Monitoring and reputation: The choice between bank loans and directly placing debt DiGeorgio, R., 2002. Making mergers and acquisitions work: What we know and don’t know – part I Dow Jones Newswire, December 3, 2002. Unilever wins investor relations award. Easterbrook, F., 1984. Two agency-cost explanations of dividends. American Economic Review 74, 650–659. Fair Disclosure Network, June 6, 2002a. Royal Ahold (AHO) Q1 2002 (conference call transcript), 1–16. Fair Disclosure Network, August 29, 2002b. Royal Ahold (AHO) Q2 2002 financial release (conference call transcript), 1–22. Fair Disclosure Network, November 19, 2002c. Royal Ahold (AHO) Q3 2002 financial release (conference call transcript), 1–18. Ferris, S., Jagannathan, M., Pritchard, A., 2003. Too busy to mind the business? Monitoring by directors with multiple board appointments Fink, R., 2001. Royal ambition: With supermarkets on four continents, Royal Ahold offers lessons in cross-border acquisitions Fuerst, O., 1998. A theoretical analysis of the investor protection regulations arguments for global listing of stocks Hart, O., 1995. Corporate governance: Some theory and implications. The Economic Journal 105, 678–689. Het Financieele Dagblad, October 6, 1990. Ahold relations. Het Financieele Dagblad, March 3, 1992a. Ahold wordt meer en meer Amerikaans. Het Financieele Dagblad, September 9, 1992b. Ahold ziet verdubbeling omzet, winst. Het Financieele Dagblad, March 19, 1994. Sterker Ahold houdt vast aan hoog groeitempo. Het Financieele Dagblad, October 29, 1999. Beleggers koesteren hun favoriet: Ahold. Het Financieele Dagblad, January 12, 2000. Topmanager 1999 opnieuw een man. Het Financieele Dagblad, May 16, 2001a. Beleggers krijgen niet meer greep op Ahold. Het Financieele Dagblad, September 7, 2001b. Ahold haalt euro 2,2 mrd op in amper 24 uur. Het Financieele Dagblad, April 6, 2002a. Ahold bekent creatief cijferen in kleine lettertjes jaarverslag. Het Financieele Dagblad, July 3, 2002b. Ahold in de Disco. Het Financieele Dagblad, October 8, 2002c. Beleggers nemen Ahold onder vuur. Het Financieele Dagblad, February 26, 2003a. De val van het solide volksaandeel Ahold. Het Financieele Dagblad, March 31, 2003b. Ahold-topman fors in het krijt bij ABN Amro. Hirshleifer, D., Teoh, S., 2003. Limited attention, information disclosure, and financial reporting. Hong, H., Huang, M., 2005. Talking up liquidity: Insider trading and investor relations. Journal of Financial Intermediation 14, 1–31. HSBC James Capel, J., November 12, 1999. Ahold: Strategically Challenged. HSBC James Capel, London. HSBC James Capel, J., March 20, 2000a. Ahold: Buying into a New Strategy. HSBC James Capel, London. HSBC James Capel, J., September 15, 2000b. Ahold: Addicted to Shopping – Acquisition of Superdiplo Jensen, M., 1986. Agency costs of free cash flow, corporate finance, and take-overs. American Economic Review 76, 323–329. Jensen, M., 2005. Agency costs of overvalued equity. Financial Management 34, 5–19. A. de Jong et al. / Journal of Accounting and Public Policy 26 (2007) 328–375