Too Little or Too Much? Reexamining the Relationship between Corporate Charitable Giving and Corporate Financial Performance

• Main Authors: WANG, Heli, CHOI, Jaepil, LI, Jiatao
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2005
• Subjects: Business Law, Public Responsibility, and Ethics; Corporate Finance; Strategic Management Policy
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/1732; https://ink.library.smu.edu.sg/context/lkcsb_research/article/2731/viewcontent/ReexaminingCorporate_CharitableGiving_2005.pdf
• Institution: Singapore Management University

How do corporate charitable contributions affect corporate financial performance? Instrumental stakeholder theory posits that corporate giving can lead to high levels of corporate financial performance through improved stakeholder relations. In contrast, agency theory suggests that corporate giving diverts valuable corporate resources and inhibits corporate financial performance. Extant empirical studies that have examined the relationship found inconclusive results. We depart from and extend the existing literature in two main aspects. First, building upon the instrumental stakeholder argument and agency perspective, we develop the argument that there is an inverse U-shaped relationship between corporate charitable giving and corporate financial performance. Second, we predict that the inverse U-shaped relationship changes over time: firms that engage in moderate amounts of giving in a later period would have a higher level of financial performance than those in an earlier period. The hypotheses are tested with a longitudinal data set of corporate giving from 1984 to 1999, providing strong support for our predictions.