Corporate Philanthropy, Agency Problems, and Shareholder Wealth

38 Pages Posted: 22 Mar 2009 Last revised: 18 Mar 2010

See all articles by Eliezer M. Fich

Eliezer M. Fich

Drexel University - Department of Finance

Diego Garcia

University of Colorado at Boulder - Leeds School of Business

Timothy C. Robinson

University of North Carolina (UNC) at Chapel Hill

Adam S. Yore

University of Missouri at Columbia - Department of Finance

Date Written: March 15, 2010

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

Suggested Citation

Fich, Eliezer M. and Garcia, Diego and Robinson, Timothy C. and Yore, Adam S., Corporate Philanthropy, Agency Problems, and Shareholder Wealth (March 15, 2010). Available at SSRN: https://ssrn.com/abstract=1364905 or http://dx.doi.org/10.2139/ssrn.1364905

Eliezer M. Fich

Drexel University - Department of Finance ( email )

LeBow College of Business
3220 Market Street – 11th Floor
Philadelphia, PA 19104
(215) 895-2304 (Phone)

Diego Garcia (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Timothy C. Robinson

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Adam S. Yore

University of Missouri at Columbia - Department of Finance ( email )

403 Cornell Hall
Columbia, MO 65211
United States
573-884-1446 (Phone)

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