Download this Paper Open PDF in Browser

Corporate Philanthropy as Signaling and Co-Optation

51 Pages Posted: 17 May 2012  

Roy Shapira

Stigler Center, University of Chicago Booth School of Business; Interdiscplinary Center (IDC)

Date Written: March 31, 2012

Abstract

This Article provides a new perspective on corporate philanthropy by examining a previously unnoticed mechanism through which corporate pro-sociality enhances firm value: signaling. In particular, cash donations can signal financial strength. A substantial and unexpected increase in the level of cash donations can signal that a firm’s insiders perceive the company’s future to be good enough to spend ultra-discretionary funds on unrelated third parties. The first contribution of this Article is in shifting focus from the traditional “buying goodwill” explanation for corporate philanthropy (i.e., companies engage in pro-social sacrifices because stakeholders are willing to pay more for corporate goodness) to a signaling explanation (i.e., pro-social sacrifices mitigate asymmetric information about a firm’s fundamentals). But corporate philanthropy is not unequivocally good for the company. This is where the Article’s second contribution comes in: examining the conditions under which corporate philanthropy decreases firm value. Under certain circumstances, managers can use their discretion over pro-social expenditures to co-opt corporate governance mechanisms, thereby increasing the level of agency costs. This occurs, for example, when managers cause companies to donate to charitable causes affiliated with independent directors. The Article next evaluates the legal implications of corporate philanthropy. In particular, the theoretical arguments presented here on how philanthropy can be good (signaling) or bad (co-optation) for the company strengthen the case for introducing some form of mandatory disclosure.

Keywords: corporate philanthropy, signaling, agency costs, corporate disclosure, corporate social responsibility

JEL Classification: K22, M14

Suggested Citation

Shapira, Roy, Corporate Philanthropy as Signaling and Co-Optation (March 31, 2012). Fordham Law Review, Vol. 80, No. 5, 2012. Available at SSRN: https://ssrn.com/abstract=2061080

Roy Shapira (Contact Author)

Stigler Center, University of Chicago Booth School of Business ( email )

Walker Hall
Chicago, IL 60637
United States

Interdiscplinary Center (IDC) ( email )

P.O. Box 167
Herzliya, 46150
Israel
972-9-9602410 (Phone)
972-9-9527996 (Fax)

Paper statistics

Downloads
200
Rank
127,377
Abstract Views
1,170