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 :

February 03 2019
SSRN Share

Keywords

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

We find that corporate giving represents a private benefit of control that reduces corporate investment and financing activity, consistent with free cash flow 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. After the 2003 dividend tax cut and hedge fund activism, charitable contributions fall, while corporate investment rises, suggesting suboptimal investment caused by managerial private benefit consumption. Negative effects of corporate giving are pronounced at firms with poor corporate governance that can avoid external capital raising.
 

Authors

Real name:
Syed Walid Reza