Private Benefits of Corporate Philanthropy and Distortions to Corporate Financing and Investment Decisions

67 Pages Posted: 2 Jan 2019 Last revised: 18 Aug 2022

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: June 7, 2022

Abstract

We find that corporate giving represents a private benefit of control that distorts corporate investment and financing activity, consistent with free cash flow agency 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. Following both the 2003 dividend tax cut and hedge fund activism, corporate charitable contributions fall while investment rises, suggesting suboptimal investment caused by managerial private benefit extraction. Acquisition announcements of firms making large charitable contributions show negative stock market reactions that are more pronounced for acquirers with poor corporate governance.

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

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

Suggested Citation

Masulis, Ronald W. and Reza, Syed Walid, Private Benefits of Corporate Philanthropy and Distortions to Corporate Financing and Investment Decisions (June 7, 2022). 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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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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Syed Walid Reza (Contact Author)

SUNY at Binghamton ( email )

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Binghamton, NY 13902-6015
United States

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