Too little or too much? The dynamic adjustment of corporate philanthropy

ABSTRACT

Previous studies in corporate philanthropy have not found conclusive evidence of specific decision-making processes applied by firms to establish a target level of charitable giving. Using panel data of Chinese firms listed on the Shenzhen and Shanghai stock exchanges between 2009 and 2016,we find that the level of corporate charitable giving and financial performance has an inverted U-type relationship, which implies that maintaining an appropriate level of charitable giving can contribute to maximizing financial performance. This result is robust to the inclusion of various control variables, and control for endogeneity and reverse causality using two-stage least squares. Based on this premise, using partial adjustment model, we find that firms dynamically adjust their charitable giving to a set optimal level. Furthermore, we find that the actual and optimal levels of charitable giving change due to the dynamic nature of the business environment and the costs associated with the adjustment to change. Further analysis shows that privately owned firms can adjust their level of charitable giving faster than state-owned firms. Our study contributes to research by applying a unique method that provides a new perspective on the process of corporate philanthropy decision-making and guides firms in philanthropy engagement.

KEYWORDS:

• Corporate philanthropy
• financial performance
• dynamic adjustment
• partial adjustment model
• corporate ownership types

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ ${\mathrm{T}\mathrm{o}\mathrm{b}\mathrm{i}\mathrm{n}}^{\prime }sq=\frac{(EquityMarketValue+liabilitiesMarketValue)}{(EquityBookValue+liabilitiesBookValue)}$

Additional information

Funding

This work was supported by the National Social Science Fund Youth Project [No. 17CGL014].