Risk factors disclosure and corporate philanthropy

Abstract

The disclosure of risk factors indicates that firms face uncertainties in their future development. Simultaneously, the revelation of such information can elevate investors' risk perception, potentially leading to the propagation of panic in the market. Consequently, risk factors disclosure may manifest in two distinct effects on corporate philanthropy behaviors. Firms might reduce their levels of charitable giving as a precautionary savings measure, or conversely, they may increase contributions motivated by self-interest. In this study, we investigate the impact of risk factor disclosure on corporate philanthropy. Our findings suggest that companies tend to escalate their corporate philanthropy efforts as a strategic response to mitigate the adverse effects of heightened risk factors disclosure. Moreover, this effect is more pronounced for firms operating in environments characterized by lower external information quality, tightened financing constraints, and increased market uncertainty. Further analysis reveals that the primary influence stems from the disclosure of internal risk factors rather than external ones. Additionally, our finding indicates that corporate philanthropy significantly mitigates the negative impact of risk factors disclosure on the liquidity of the firms' stock.