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 :

October 03 2019
SSRN Share

Keywords

  • Corporate giving • 
  • charitable contributions • 
  • private benefits of control • 
  • financing decisions • 
  • Hedge Fund Activism

We find corporate giving as a private benefit of control distorts investment and financing decisions, for reasons consistent with Jensen’s (1986) free cash flow theory. Such investment distortions reduce shareholder wealth, especially in internally cash-financed, diversifying acquisitions. Corporate giving also encourages managers to avoid external financing, especially debt financing.

Reductions in charitable contributions following the 2003 dividend cut and hedge fund activism boost corporate investment, suggesting that reduced investment is an opportunity cost of private benefit consumption. The negative effects of corporate giving are more pronounced in firms that can avoid external capital market monitoring and exhibit poor corporate governance.

Authors

Real name:
Syed Walid Reza