Causes and Effects of Corporate Donations: Evidence from a Natural Experiment in China

Project: Research

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Researcher(s)

Description

An unprecedented earthquake devastated Wenchuan county of Sichuan on May 12, 2008 and caught the attention of the world. Flurries of donations were made from home and abroad to fund the emergency relief and reconstruction work after the quake. I exploit this as a natural experiment to study the causes and effects of corporate donations by focusing on Chinese listed companies. In doing so, I appeal to three important strands of the literature. First, the causes and effects of corporate donations have long been of interest to researchers with a growing literature focusing on whether donations improve or hurt corporate performance in the U.S. However, this line of research has produced mixed results and has been seriously hampered by the identification problem due to the reverse causality between donations and performance as well as data issues related to sample selection bias that emanates from voluntary disclosure of donation data. Exploiting the earthquake donations as a natural experiment, my study contributes new insights to this literature. The donation data used in my study are clean, homogenous (for the same emergency relief purpose and unlike in the U.S. that has different state laws, corporate donation in China is subject to homogenous tax treatment), and do not have significant sample selection bias. The unanticipated earthquake represents an exogenous event to all companies and this feature minimizes the reverse causality issue that plagues prior studies on the motives of donation and its effect on firm performance. Second, taking advantage of the unique ownership structure (co-existence of state-owned and privately-owned companies) in the Chinese corporate sector, my study is the first to examine the different motives and effects of corporate donations between stated-owned and privately-owned firms. This helps to address the dearth of evidence regarding the role of corporate governance in corporate social responsibility decisions (Starks, 2009, p.465). It also helps uncover a new moderating mechanism of the donation-performance relation. Third, the study extends the literature regarding the incentives of government ownership and its effects on corporate decisions by focusing a new angle ? corporate donations. Evidence from this study is clearly of strong local relevance and has important implications for investors.Starks, L.T., 2009. EFA keynote speech: “Corporate governance and corporate social responsibility: What do investors care about? What should investors care about?” Financial Review 44, 461-468.

Detail(s)

Project number9041621
Grant typeGRF
StatusFinished
Effective start/end date1/12/101/08/13