Corporate philanthropy in a politically uncertain environment: does it bring tangible benefits to a firm? Evidence from China

Abstract

ABSTRACTWe examine the impact of political uncertainty on a firm’s corporate philanthropy (CP) contribution and the associated direct tangible benefits of CP to a firm. Specifically, we examine two testable hypotheses. (1) When facing political uncertainty, a firm makes more CP, and (2) after a firm makes CP contributions during a period of uncertainty, it will obtain future tangible benefits. Using a sample of Chinese listed firms, we document that a firm, on average, increases its CP significantly during a period of political uncertainty (e.g. when there is a new local communist party secretary or mayor). In addition, we report that, on average, a firm’s donation in year t is positively correlated with its amount of government subsidies, corporate income tax reduction, and short- and long-term bank loan amounts in year t + 1. The findings are robust compared to those of placebo tests and fixed effect models, as well as when using an alternative measure of political uncertainty. We observe that the results are more pronounced among non-state-owned enterprises (non-SOEs) than those among SOEs, corroborating the notion that during a period of political uncertainty, non-SOEs are more willing to build political connections with new city leaders through CP than are SOEs.