Abstract
In this article, we propose that giving in cash and non-cash (in-kind) differ in their relation with the giving firm’s future corporate financial performance (CFP) and only cash giving is associated with future CFP. Using a novel dataset from ASSET4 that differentiates corporate giving over a sample period of 2002–2012, we examine three competing hypotheses: (1) agency cost hypothesis that cash giving reflects agency cost and destroys value for shareholders, (2) investment hypothesis that cash giving is an investment by management that aims for better future return, and (3) information hypothesis that cash giving has informational value to shareholders as cash is a critical resource at a firm and giving is a decision by managers who are insiders. We find that indeed, only cash giving is positively associated with future CFP and firm value, measured by Fama–French five-factor abnormal risk-adjusted stock returns, future return on assets, and Tobin’s Q. In addition, we find that the positive association exists only between excess, i.e., unexpected, but not expected cash giving and future CFP. Our empirical findings support the information hypothesis, but neither the agency hypothesis nor the investment hypothesis, and are robust to a number of endogeneity tests, including orthogonalized cash giving, instrumental variable regression using geography-based instruments, and propensity score matching. Furthermore, we show that the positive association between future CFP and unexpected cash giving is only pronounced at firms with good governance and relatively higher sales growth where agency problems are less likely, and at firms with no alternative mechanisms to demonstrate the strength of cash flow. Additionally, we do not find evidence that suggests in-kind giving to possess any informational value.
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Notes
For instance, many companies allocate significant portions of their expense budgets to corporate philanthropy, with large U.S. firms spending US$20 billion and US$18.5 billion on corporate philanthropy in 2012 and 2014, respectively (Giving in Numbers 2013, 2015). In addition to presenting a profile of corporate philanthropy in 2012, the Giving in Numbers (2013) report pinpoints how corporate giving has continued to evolve and become more focused since the onset of the global financial crisis. Giving in Numbers (2015) suggests that corporate giving grew for 56 % of companies between 2012 and 2014, and it increased by more than 10 % for 42 % of companies.
A donation may take various forms, including cash giving and in-kind donations. In-kind donations are those donations that are done in goods and services rather than money (or cash). An in-kind donation could be donating goods, such as a store donating trash bags to a cleanup project, a restaurant donating food for a community event, and an individual donating their used clothes to the local thrift store. An in-kind donation could also be donating the time or professional services. This could include regular volunteers at museums, an accountant doing the taxes for a non-profit, and company staff helping to plant trees on company time. All of these things benefit the non-profit but are not financial donations.
Lys et al. (2015) distinguish the active signal, i.e., the signal of the firm’s future CFP through CSR expenditures from the passive signal, i.e., the informational implications of CSR expenditures for the firm’s future CFP.
The problem is that for developing countries, research into these first world problems may seem beneficial, but the benefit can only be reaped by the developing world if it is in the context of good IPR programs that make the medication available and affordable to those who need it (Green 2013).
We only consider cash dividends, not stock dividends. The mean amount of annual cash giving is US$26.2 million and the annual mean dividend commitment is US$342.3 million, respectively, for firms with a total asset size of greater than US$1 billion.
According to Thompson Reuters, only corporate giving is included for total giving, employee donated or raised money is not. All donations by the company and its foundations and trusts are also included. Cash giving only includes the amount that the company classifies as such. Some companies only conduct cash or in-kind giving, and do not have total giving information. Thompson Reuters leaves the entry blank if no public information is available.
Consistent with past research in strategic management (see Kor and Mahoney 2005; Jayachandran et al. 2013), we use Tobin’s Q as a measure of firm performance. Compared to accounting-based measures, Tobin’s Q is a forward-looking measure and reflects future profitability. Furthermore, Tobin’s Q has several desirable characteristics such as scale independence and robustness to accounting manipulations. Tobin’s Q is also widely used as a measure of firm value in finance (Chung and Jo 1996; Servaes and Tamayo 2013). We use the formula proposed by Chung and Pruitt (1994) to compute Tobin’s Q.
The five risk factors are the three Fama–French factors (return on market index minus risk-free interest rate (market), return on small-firm stocks less return on large-firm stocks (SMB), and return on high book-to-market–ratio stocks less return on low book-to-market-ratio stocks (HML), Fama and French (1993), the Carhart (1997) momentum factor, and the Pastor and Stambaugh (2003) liquidity factor.
The ASSET4 corporate governance performance scores are composite scores on (i) board structure, such as the percentage of independent board members, CEO-chair separation, board size, and board diversity; (ii) board function, such as the degree of audit committee independence, degree of compensation committee independence, degree of nomination committee independence, number of board meetings, and the average board meeting attendance; (iii) compensation policy, such as remuneration packages, stock option programs, vesting of stock options, and total board member compensation; (iv) shareholder rights, such as voting rights, ownership, classified board structure, and staggered board structure; and (v) vision and strategy, such as a CSR sustainability committee, Global Reporting Initiative (GRI) report guidelines, CSR sustainability report global activities, and CSR sustainability external audits.
We use the Fama–French 48 industry classification (FF48) in Eq. (1) and the Fama–French 12 industry classification (FF12) in Eq. (2) to capture the industry fixed effects. In Eq. (2), when FF48 is used, due to the substantial multicollinearity problem between the variables, statistical inferences become inaccurate. Because we use Eq. (1) to estimate excess donations using the residuals only, multicollinearity is less of a concern as it only contaminates the standard errors.
Jiraporn et al. (2014) show that a firm’s CSR policy is significantly influenced by the CSR policies of firms in the same area, either due to investor clientele, local competition, and/or social interactions.
We use the mean cash giving at all other firms in the same state or in the same industry as our instrumental variables because a firm’s cash giving policies and practices are likely affected by other firms’ giving practices in the same state or in the same industry. Thus, these instruments satisfy the first condition for a valid instrument, i.e., they are highly correlated with firm-level cash giving. Other firms’ cash giving practices, however, should not affect the own firm’s individual financial performance. Regarding the second-stage exclusion restriction, we consider that other firms’ cash giving practices should not affect the own firm’s CFP directly because other firms’ cash giving alone does not necessarily drive own firm’s CFP. Thus, our instruments also satisfy the second-stage exclusion restriction.
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Acknowledgments
We thank Murali Chari, Rajib Doogar, Jean Kabongo, Yongtae Kim, Kevin Laverty, P.K. Sen, Keven Zhou, and seminar participants at the University of Washington Bothell, School of Business for their many valuable comments.
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Chang, K., Jo, H. & Li, Y. Is there Informational Value in Corporate Giving?. J Bus Ethics 151, 473–496 (2018). https://doi.org/10.1007/s10551-016-3230-7
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DOI: https://doi.org/10.1007/s10551-016-3230-7