Corporate donations and shareholder value
Do corporate donations enhance shareholder wealth or reflect agency problems?
In their recent working paper, Prof. Renneboog (Tilburg University) and Prof. Liang (Singapore Management University) address this question for a global sample of firms whereby they distinguished between charitable and political donations, as well as between donations in cash and in kind.
In their study, they find that charitable donations are positively related to financial performance and firm value, which is consistent with the value-enhancement hypothesis. This positive effect on firm value is stronger for cash than in-kind donations.
In contrast, they find that political donations do not appear to enhance shareholder value, but rather tend to reflect agency problems, as they are higher for firms with poor internal corporate governance and strong managerial entrenchment. Endogeneity concerns were addressed by using peer firms’ donations as an instrument in a two-stage least squares (2SLS) setting and by conducting a difference in difference analysis around a general election.