Corporate Philanthropy and the Cost of Equity Capital

54 Pages Posted: 21 Sep 2017 Last revised: 5 Mar 2018

See all articles by J. Scott Judd

J. Scott Judd

University of Illinois at Chicago

Stephen J. Lusch

Texas Christian University - Department of Accounting

Date Written: March 2, 2018

Abstract

Using the Million Dollar List dataset containing major corporate philanthropic gifts, we examine whether corporate philanthropy is associated with a firm’s cost of equity capital. On one hand, philanthropy is an allocation of shareholder returns to a third party with uncertain returns, thereby increasing business risk. On the other hand, corporate philanthropy may increase public perceptions of the firm resulting in higher and more certain cash flows, decreasing business risk. Given these competing predictions, the effect of corporate philanthropy on the cost of equity is unclear. We find that, on average, when firms make large philanthropic donations, they experience an increase in their cost of capital. However, this effect is mitigated among firms that are able to use corporate giving as a marketing tool and that have lower agency costs. Furthermore, our findings are robust to propensity score matching and Heckman’s two-stage procedure. Overall, our findings suggest that giving large individual gifts negatively affects a firm’s external financing costs.

Keywords: Philanthropy, Cost of Equity Capital, Corporate Reputation, Agency Cost

JEL Classification: M14, G12, M41

Suggested Citation

Judd, Joshua and Lusch, Stephen J., Corporate Philanthropy and the Cost of Equity Capital (March 2, 2018). Available at SSRN: https://ssrn.com/abstract=3040170 or http://dx.doi.org/10.2139/ssrn.3040170

Joshua Judd (Contact Author)

University of Illinois at Chicago ( email )

601 S Morgan St. 2302 UH
Chicago, IL 60607
United States

Stephen J. Lusch

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
93
Abstract Views
601
rank
292,074
PlumX Metrics