Paying by Donating: Corporate Donations Affiliated with Independent Directors

Kelley School of Business Research Paper No. 16-51

Review of Financial Studies, forthcoming

80 Pages Posted: 30 Jun 2016 Last revised: 10 Jun 2020

See all articles by Ye Cai

Ye Cai

Santa Clara University - Leavey School of Business

Jin Xu

Virginia Tech - Pamplin College of Business

Jun Yang

Indiana University - Kelley School of Business - Department of Finance

Date Written: May 26, 2020

Abstract

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

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

Ye Cai

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

Jin Xu

Virginia Tech - Pamplin College of Business ( email )

Department of Finance
880 West Campus Dr
Blacksburg, VA 24061
United States

HOME PAGE: http://finance.pamplin.vt.edu/directory/xu.html

Jun Yang (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3395 (Phone)
812-855-5875 (Fax)

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