Doing Good Deeds in Times of Need: A Strategic Perspective on Corporate Disaster Donations

Abstract

Major corporations often respond charitably to humanitarian needs in times of disaster. However, disasters can also be negative events that impose non-trivial costs on firms, and under adverse conditions, firms typically donate less, not more. This paper takes a strategic perspective on corporate magnanimity in times of crisis by looking at the relationship between firm value, reputation, and philanthropy in the case of Hurricane Katrina. First, we consider how Katrina may have had negative effects on stock prices of U.S. Fortune 500 firms. Second, we investigate whether a reputation for irresponsible behavior might affect 1) the magnitude of the disaster’s effect on stock prices and 2) the likelihood of making philanthropic donations to disaster relief. We find that Katrina had a significant negative impact on firms’ stock prices. Further, we find that the more a firm was known for social irresponsibility, the more negative the abnormal returns during Katrina, and the greater the likelihood of making a donation in response to Katrina. Our findings have theoretical and managerial implications for the value of reputation and corporate philanthropy.

Keywords: corporate philantrophy, firm value, disasters, Hurricane Katrina, social irresponsibility

JEL Classification: G14, L21, M14