Business Groups and Tunneling: Evidence from Corporate Charitable Contributions by Korean Companies

Abstract

This paper investigates whether corporate philanthropic decisions are associated with a firm’s listing status and business group affiliation. Analyzing a large sample of public and private firms in Korea, we find that (1) public firms make more charitable contributions than private firms and (2) business group-affiliated firms make more charitable contributions than non-affiliated firms. The results suggest that public firms, owing to greater public scrutiny, and business groups, owing to higher political costs, are encouraged to make more corporate charitable contributions. Further, we find that (3) the greater corporate giving by public firms than private firms is more pronounced for business group-affiliated firms, compared with non-affiliated firms. The result is consistent with business groups’ strategic coordination of their affiliates’ philanthropic decisions to maximize the value of the business group as a whole or to tunnel business group resources out to controlling shareholders who hold a larger portion of private affiliates than public affiliates.