A Modigliani-Miller Theory of Altruistic Corporate Social Responsibility

Topics in Economic Analysis & Policy, Vol. 5, No. 1, 2005

Posted: 30 Jun 2003

See all articles by Arthur A. Small

Arthur A. Small

affiliation not provided to SSRN

Joshua Graff Zivin

Columbia University - Department of Health Policy and Management; National Bureau of Economic Research (NBER)

Abstract

A new theory of altruistic corporate social responsibility is developed. Firms that advertise their social and environmental good works in effect solicit charitable contributions from customers, employees, investors and other stakeholders. They compete with not-for-profits in the market to supply public and altruistic goods. To analyze how corporate altruism affects firm valuations, a model is developed in which investors gain utility both from personal consumption and from making donations to worthy causes. A share in a responsible firm is a charity-investment bundle. When individuals view corporations and not-for-profits as equally competent suppliers of charity-related warm glow, small changes in firms' social policies induce exactly offsetting changes in individuals' portfolio choices. There is no effect on firm valuations, and no change in the aggregate supply of good works. When a sizable fraction of investors prefer corporate philanthropy over direct charitable giving (e.g., to avoid taxation of corporate profits), firm valuations will be maximized by following social policies that involve strictly positive levels of corporate altruism.

Keywords: corporate social responsibility, socially responsible investing, green investing, altruism, charity

JEL Classification: M14, L33, L21, D64, G11

Suggested Citation

Small, Arthur A. and Zivin, Joshua Graff, A Modigliani-Miller Theory of Altruistic Corporate Social Responsibility. Topics in Economic Analysis & Policy, Vol. 5, No. 1, 2005 , Available at SSRN: https://ssrn.com/abstract=325921 or http://dx.doi.org/10.2139/ssrn.325921

Arthur A. Small (Contact Author)

affiliation not provided to SSRN

Joshua Graff Zivin

Columbia University - Department of Health Policy and Management ( email )

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New York, NY 10032
United States

National Bureau of Economic Research (NBER)

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