How Does the Market React to Corporate Philanthropic Behavior? —evidence from the COVID-19 Pandemic Shock

ABSTRACT

Based on 1,130 listed Chinese firms’ charitable donation data during the COVID-19, this paper used the Event Study to examine market reactions to the epidemic and utilized OLS and Heckman two-stage models to investigate the impact of charitable donations on corporate market performance. Results show that greater corporate charitable material and medical donations result in more favorable short-term market reaction but weaker in the long term. Moreover, the low-leveraged, non-pharmaceutical, and non-SOEs can obtain better short-term performance through philanthropic donations. Findings suggest that the negative market sentiment from the COVID-19 cannot be offset by the short-term positive effects of corporate donations.

KEYWORDS:

• COVID-19 pandemic
• corporate philanthropy
• corporate social responsibility
• market reaction

JEL CLASSIFICATION:

• I18
• G14
• M14

Acknowledgments

We thank all the editors, reviewers, discussants, and colleagues for their helpful comments. All errors are our own.

Declaration Of Interest

The authors declare that the research was conducted in the absence of any commercial or financial relationships that could be construed as a potential conflict of interest.

Notes

1. Environmental, social, and governance (ESG) criteria are an increasingly popular way for investors to evaluate companies they might want to invest.

2. Under the impact of disasters, corporate charitable donations can reduce the losses that enterprises may bear. Muller and Whiteman (2009) first regarded this Corporate Philanthropic Disaster Response (CPDR) behavior as an implicit investment in the company’s social welfare. It often receives media attention, which develops a positive corporate image and improves customer relations in maintaining sustainable performance.

3. The official website of China Asociation for Public Companies: http://www.capco.org.cn/.

4. On February 6, 2020, the Ministry of Finance and the State Taxation Administration in China issued the “Announcement on the Tax Policy for Donations in Support of the Prevention and Control of the Novel Coronavirus Pneumonia Epidemic” (2020 Announcement No. 9 of the Ministry of Finance and the State Taxation Administration in China). This announcement has five articles implemented since January 1, 2020. Announcement No. 9 stipulates that during the COVID-19, qualified corporate philanthropic donations can help firms to deduct the same proportional taxes at once in that year, and this deduction is not restricted by the ratio of donation expenditures to total annual profits. The announcement expands the proportion of pretax deductions for firms in the current year and is no longer restricted on the donation amount.

Additional information

Funding

The paper was supported by the research funds from the Capital University of Economics and Business [No. 01592065119128]; and the funds from the Capital University of Economics and Business [No. 2021XSXR12].