Private Benefits and Corporate Investment and Financing Decisions: The Case of Corporate Philanthropy

Private Benefits and Corporate Investment and Financing Decisions: The Case of Corporate Philanthropy

Ronald Masulis, Syed Walid Reza

Series number :

Serial Number: 
603/2019

Date posted :

April 05 2019

Last revised :

September 13 2020
SSRN Share

Keywords

  • Corporate giving; charitable contributions; private benefits of control; investment decisions; financing decisions; hedge fund activism.

We find that corporate giving represents a private benefit of control that distorts corporate investment and financing activity, consistent with free cash flow agency theory. Corporate giving discourages managers from pursuing external financing, especially debt issuance, to minimize outside monitoring. It creates preferences for internally financed cash acquisitions for the same reason.

These distortions reduce shareholder wealth. Following the 2003 dividend tax cut or hedge fund activism, corporate charitable contributions fall, while investment rises, suggesting suboptimal investment caused by managerial private benefit extraction. Event studies show negative stock market reactions that are more pronounced for firms with poor corporate governance.

Authors

Real name:
Syed Walid Reza