Greed is Good: The Agency Costs of Blockholder Philanthropy

Abstract

Recent experimental research in corporate social responsibility suggests that principal philanthropy offers benefits to the firm. I test this finding using archival data in a natural experiment. In publically traded firms, I find that charitable pledges by blockholders create agency problems that overwhelm any benefits and destroy shareholder value. This effect is stronger when the blockholder has, beyond his economic incentives, a fiduciary duty (as a director or fund manager) to monitor the firm and its managers. I attribute these findings to small investors relying on the self-interest of major shareholders to monitor their shared investment. A charitable pledge lessens the market’s expectation of the philanthropic blockholder’s self-interest, which reduces the ability of small investors to rely on him (and his preference for wealth-maximization) to monitor the firm.