Disaster Relief, Inc.: When Is Corporate Philanthropy Good or Bad for Shareholders?

Abstract

A long–standing question in finance is why companies donate to charity, often attributing it to either managerial agency problems or strategic behavior. Based on a global sample of donation announcements by firms providing relief to disaster–affected communities, we test the relative importance of these two motives and the conditions under which each dominates. We exploit disaster–specific factors in an event study setting around corporate donation announcement dates to show that, on average, relief donations decrease returns. However, the strategic benefits of donating around salient events can mitigate these negative effects. To account for firms’ donation decisions, we rely on exogenous variation in the availability of corporate charitable funds due to the timing of disasters relative to firms’ financial years. We show that donations provide new information to the market, and that negative returns are primarily driven by cash donations made via corporate foundations.

Keywords: Natural disasters, corporate philanthropy, shareholder value, strategic benefits, agency costs

JEL Classification: G32, G34, L21, M14