Private Benefits and Corporate Investment and Financing Decisions: The Case of Corporate Philanthropy
59 Pages Posted: 2 Jan 2019 Last revised: 12 Feb 2020
Date Written: February 3, 2020
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
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