Agency Problems of Corporate Philanthropy

Review of Financial Studies, Forthcoming

ECGI - Finance Working Paper No. 370

63 Pages Posted: 16 Mar 2013 Last revised: 14 Mar 2017

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Syed Walid Reza

SUNY at Binghamton

Date Written: February 3, 2014

Abstract

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

Masulis, Ronald W. and Reza, Syed Walid, Agency Problems of Corporate Philanthropy (February 3, 2014). Review of Financial Studies, Forthcoming; ECGI - Finance Working Paper No. 370. Available at SSRN: https://ssrn.com/abstract=2234221 or http://dx.doi.org/10.2139/ssrn.2234221

Ronald W. Masulis (Contact Author)

University of New South Wales - Australian School of Business ( email )

Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Syed Walid Reza

SUNY at Binghamton ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States

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