How Aspiration-Relative Performance Affects Corporate Philanthropy

Abstract

Research on the economic slack perspective suggests that high-performing firms are able and willing to be involved in philanthropic activities, yet less attention has been given to the potential negative effects of being high performing. Drawing upon the red queen effect and the myopic loss aversion perspective, we argue that high-performing firms are saddled with large threat of declines in their future relative financial performance and then crowd out their long-term orientation, manifesting a low level of corporate philanthropy engagement. We identify the cause of such response to be the myopic loss aversion of executives. The degree of myopic loss aversion depends on the institutional environments and market conditions. We further document that firms owned by the state and surrounded by a high level of religious atmosphere are less likely to experience myopic loss aversion, whereas market competition intensifies this perception of myopic loss aversion.