Is Corporate Philanthropy Really Enhances Firms Value?

Abstract

This study addresses the link between corporate philanthropic performance and corporate financial performance to test whether corporate philanthropy enhances a firm’s value or not. Stakeholder theory supports a positive relationship between corporate philanthropic performance and corporate financial performance by empowering corporations to preserve basic resources controlled by stakeholders. Excessive CP creates agency cost, hence agency cost with higher CP makes an inverse U shape curve for corporate philanthropic performance and corporate financial performance. We used data on an annual basis from 2004 to 2013 for 2,307 firms listed at the Shanghai and Shenzhen stock exchanges including all industries. We used the Heckman model to counter the effect of selection bias with the probit model to select, whether either firm is a giver or not using micro and macro determinants along with fixed effect hierarchal regression for the first stage. In the Second stage, we used panel data to estimate CFP. We introduce quadratic terms in the model to justify curvilinear relationships. Results reveal that corporate philanthropic performance and corporate financial performance showed an inverse U shape association. Corporate philanthropy enhances a firm’s value till stakeholder theory works and agency cost does not arise.