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

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

Ronald Masulis, Syed Walid Reza

Series number :

Serial Number: 
603/2019

Date posted :

April 05 2019

Last revised :

August 26 2021
SSRN Share

Keywords

  • corporate giving; charitable contributions • 
  • private benefits of control • 
  • investment decisions • 
  • financing decisions • 
  • Hedge Fund Activism

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.

View full abstract

Authors

Real name:
Syed Walid Reza