Shareholder reaction to corporate philanthropy after a natural disaster: an empirical exploration of the “signaling financial prospects” explanation

Abstract

Corporate response to natural disaster in the forms of cash and/or in-kind donations (corporate philanthropic disaster response, or CPDR) is a growing form of corporate philanthropy. Through an event study methodology based on 1,775 firms listed on the Tokyo Stock Exchange, we analyze shareholder reaction to CPDR announcements after the 2016 Kumamoto earthquakes in Japan. Controlling for the possibility that the most common explanations (buying goodwill and corporate governance) are at play, our results provide an empirical test of a little-explored explanation for the positive shareholder reaction to CPDR: namely, that corporate philanthropy is a market signal to outside investors of the firm’s future financial prospects. We find this explanation to be significant. Of note are also the facts that shareholder reaction is only significantly positive in the case of cash donation (as opposed to in-kind), and is more positive when announced early. Overall, our results align with the “strategic philanthropy” view grounded in resource-dependence theory. But instead of the typical focus on non-financial stakeholders, we argue that philanthropic donations can be used to directly influence investors.