Paying by Donating: Corporate Donations Affiliated with Independent Directors

Corporate donations to charities affiliated with the board’s independent directors (affiliated donations) are large and mostly undetected due to lack of formal disclosure. Affiliated donations may impair independent directors’ monitoring incentives. CEO compensation is on average 9.4% higher at firms making affiliated donations than at other firms, and it is much higher when the compensation committee chair or a large fraction of compensation committee members are involved. We find suggestive evidence that CEOs are unlikely to be replaced for poor performance when firms donate to charities affiliated with a large fraction of the board or when they donate large amounts.

Keywords: Director Independence; Monitoring Incentives; Corporate Charitable Contributions

JEL Classification: G34, J33, M52

Suggested Citation: Suggested Citation

Cai, Ye and Xu, Jin and Yang, Jun, Paying by Donating: Corporate Donations Affiliated with Independent Directors (May 26, 2020). Kelley School of Business Research Paper No. 16-51, Review of Financial Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=2801817 or http://dx.doi.org/10.2139/ssrn.2801817