“Private Benefits and Corporate Investment and Financing Decisions: The Case of Corporate Philanthropy” by Professor Ronald Masulis
Professor Ronald Masulis
Scientia Professor of Finance
UNSW School of Business
University of New South Wales
We find that corporate giving as a private benefit of control distorts investment and financing decisions, results supporting Jensen’s (1986) free cash flow theory. These investment distortions reduce shareholder wealth, especially in cash-financed, diversifying acquisitions. Corporate giving also encourages managers to avoid external financing, especially debt financing. Reductions in charitable contributions after the 2003 dividend cut and hedge fund activism boost corporate investment, suggesting that one important opportunity cost of private benefit consumption is reduced investment. Furthermore, the negative effects of corporate giving on investment are more pronounced in firms able to avoid external capital market monitoring and in firms with poor corporate governance.