Private Benefits and Corporate Investment and Financing Decisions: The Case of Corporate Philanthropy

59 Pages Posted: 2 Jan 2019 Last revised: 12 Feb 2020

See all articles by Ronald W. Masulis

Ronald W. Masulis

University of New South Wales, Sydney; 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, 2020

Abstract

We find that corporate giving represents a private benefit of control that reduces corporate investment and financing activity, consistent with free cash flow theory. Corporate giving discourages managers from pursuing external financing, especially debt issuance, to minimize outside monitoring. It creates preferences for internally-financed cash acquisitions, for the same reason. These distortions reduce shareholder wealth. After the 2003 dividend tax cut and hedge fund activism, charitable contributions fall, while corporate investment rises, suggesting suboptimal investment caused by managerial private benefit consumption. Negative effects of corporate giving are pronounced at firms with poor corporate governance that can avoid external capital raising.

Keywords: corporate giving; charitable contributions; private benefits of control; financing decisions; hedge fund activism

JEL Classification: G30; G31; G32; G34; G3

Suggested Citation

Masulis, Ronald W. and Reza, Syed Walid, Private Benefits and Corporate Investment and Financing Decisions: The Case of Corporate Philanthropy (February 3, 2020). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 603/2019. Available at SSRN: https://ssrn.com/abstract=3298951 or http://dx.doi.org/10.2139/ssrn.3298951

Ronald W. Masulis

University of New South Wales, Sydney ( email )

UNSW Business School
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European Corporate Governance Institute (ECGI) ( email )

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Financial Research Network (FIRN)

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

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Singapore

Syed Walid Reza (Contact Author)

SUNY at Binghamton ( email )

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

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