Corporate Philanthropy, Agency Problems, and Shareholder Wealth

Abstract

In a large sample of publicly traded firms during 1998-2006 we find that companies donating to charity display weaker governance, excess free cash flow, lower market-adjusted returns and a higher propensity to be defendants in class action fraud lawsuits. Giving CEOs receive $1.4 million in additional compensation and extra perquisites but are less likely to be dismissed for poor performance. Consistent with Jensen and Meckling (1976), our results indicate that corporate philanthropy proxies for residual agency problems: when managers have discretion to give the firm’s money away to charities, firms face severe agency problems.

Keywords: Corporate Philanthropy, Agency Costs, Shareholder Wealth

JEL Classification: G30, K22, J33