Agency Problems of Corporate Philanthropy
Review of Financial Studies, Forthcoming
63 Pages Posted: 16 Mar 2013 Last revised: 14 Mar 2017
Date Written: February 3, 2014
Evaluating agency theory and optimal contracting theory of corporate philanthropy, we find that as giving increases, shareholders reduce their valuation of cash holdings. Dividend increases following the 2003 Tax Reform Act are also associated with reduced corporate giving. Using a natural experiment, we find that corporate giving is positively (negatively) associated with CEO charity preferences (CEO shareholdings and corporate governance). Evidence from CEO-affiliated charities, market reactions to the disclosure of insider-affiliated donations, the relation to CEO compensation and firms contributing to director-affiliated charities indicates that firm donations advance CEO interests and suggest that misuse of corporate resources reduces firm value.
Keywords: Corporate governance, corporate philanthropy, corporate charities, agency costs, CEO compensation
JEL Classification: G30, G34, J33, N3
Suggested Citation: Suggested Citation