Abstract
Agency theory and profit maximization theory offer competing views on corporate philanthropic activities. Using hand-collected data, I evaluate these theories and find evidence more consistent with the agency theory. CEOs’ relation with nonprofit institutions, weaker alignment incentives of managers and weaker governance structure increase the likelihood and amount of corporate giving in general and foundation giving (which is a more stable source of donations) in particular. To analyze whether private benefits of corporate giving are optimally factored into CEO compensation, I develop an instrumental variable framework to address the direction of relation between compensation and firm donations. By using natural disasters as an instrument of corporate giving, I find that CEOs use firm donations to insulate their compensation particularly by supporting causes related to directors’ interests. Results also show that corporate giving reduces stock returns by lowering the marginal dollar value of cash. Lastly, negative stock price reaction to the news of unexpected firm donations further confirms the agency theory of corporate giving.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
