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Corporate Philanthropy, Ownership Type, and Financial Transparency

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Abstract

Drawing on stakeholder theory and the concept of enlightened self-interest, we argue that firms that actively engage in corporate philanthropic giving also tend to demonstrate greater concern for investors’ interests by providing more transparent financial information and avoiding corporate misconduct. Moreover, the relationships between corporate giving, financial information transparency, and corporate misconduct vary significantly according to the firm’s ownership type, which affects the fundamental motivations for corporate philanthropy. In a sample of Chinese publicly listed firms from the 2003–2009 period, we find a positive relationship between corporate giving and financial transparency, and note that the relationship is stronger for non-state-owned enterprises (non-SOEs). We also find a significantly negative association between corporate giving and corporate misconduct for non-SOEs, but not for SOEs. Taken together, these findings suggest that responsibility to both stakeholders and shareholders is a vital part of building trust and reputations in China’s non-SOE sector.

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Notes

  1. Following the definition of the U.S. Financial Accounting Standards Board (FASB), we define corporate philanthropy (also referred to as corporate giving) as “an unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner” (FASB 1993; SFAS 116).

  2. The instrumental theory of stakeholder management is based on a synthesis of the stakeholder concept, economic theory, behavioral science, and ethics (Jones 1995, p. 404). It should be noted that in spite of the instrumental nature of our arguments, this study does not preclude ethically motivated corporate giving or any other related socially responsible activities (Chiu and Sharfman 2011).

  3. In December 2007, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) released an official guide on CSR implementation for SOEs controlled by the central government. Further, in 2008, both the Shanghai and Shenzhen Stock Exchanges issued guidelines encouraging listed companies in China to engage in more CSR activities.

  4. Shleifer (2004) and Gelb and Strawser (2001) also find that socially responsible firms provide better/more accounting information.

  5. See http://www.sasac.gov.cn/n1180/n1566/n259760/n264851/3621925.html.

  6. Building close ties with the government helps non-SOEs to overcome many obstacles to smooth business operations, secure better property rights protection, and ultimately achieve better financial performance and an increase in firm value (Fisman 2001; Su and He 2010).

  7. In contrast to China’s non-SOEs, its SOEs are strongly attached to the political regime through many channels, and thus encounter less difficulty in accessing the product and capital markets (Wang et al. 2008b), obtaining favorable regulations (Agrawal and Knoeber 2001), accessing bank loans (Faccio 2006; Khwaja and Mian 2005), and securing property rights protection (Su and He 2010).

  8. Panel A of Table 1 shows that the number of firms that make donations (or do not make donations) in 2008 is significantly different from other years, possibly due to the earthquake in Wenchuan China that occurred that year (Gao et al. 2012). To check the robustness of our results, in an additional test (untabulated) we remove all of the observations from 2008 and obtain quantitatively similar results.

  9. In seven cases among the samples with D_Enforce = 1, the level of enforcement imposed by CSRCwas recorded as “Others”; as such we drop these seven observations in all the tests which use Enforce as dependent variable (i.e., model 6-10 in Table 6).

  10. Our final sample included 51, 64, 1, 2, 1, and 50 observations with Enforce equal to 1, 2, 3, 4, 5, and 6, respectively; there were no cases where Enforce was equal to 7.

  11. Some studies on corporate giving also use the total dollar value of the contribution (Seifert et al. 2003) or total giving scaled by sales (Brown et al. 2006; Wokutch and Spencer 1987) to measure corporate giving activities. We conducted an additional robustness test using these measures and obtained similar results.

  12. The results are available upon request.

  13. Several prior studies have examined the relationship between financial reporting quality and CSR performance (Kim et al. 2012); however, they did not examine corporate philanthropic giving in particular.

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Authors and Affiliations

  1. Department of Management, City University of Hong Kong, Kowloon Tong, Hong Kong

    Cuili Qian

  2. Business School, Sun Yat-Sen University, Guangzhou, China

    Xinzi Gao

  3. School of Accountancy, The Chinese University of Hong Kong, Shatin, Hong Kong

    Albert Tsang

Authors
  1. Cuili Qian
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  2. Xinzi Gao
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  3. Albert Tsang
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Corresponding author

Correspondence to Xinzi Gao.

Appendix

Appendix

Variable definitions

Variable

Definition

Overall financial opacity

Average rank of earnings aggressiveness, loss avoidance, and earnings smoothing

Earnings aggressiveness

Percentile rank of scaled accruals of a sample firm in year t. Scaled accruals are defined as (ΔCA kt  − ΔCL kt  − ΔCASH kt  + ΔSTD kt  − DEP kt  + ΔTP kt )/TA kt−1, where ΔCA is change in total current assets, ΔCL is change in total current liability, ΔCASH is change in cash, ΔSTD is change in current portion of long-term debt included in total current liabilities, DEP is depreciation and amortization expense, ΔTP is change in income taxes payable, and TA is total assets

Loss avoidance

Percentile rank of the ratio of the number of years with small positive earnings minus the number of years with small negative earnings divided by their sum. We define firms with small positive earnings (small negative earnings) as firms with bottom-line net income scaled by lagged total assets between 0 and 1 percent (between 1 and −1 %)

Earnings smoothing

Percentile ranks of the correlation between the change in accruals and the change in cash flow, both scaled by lagged total assets in year t.

D_Enforce

A dummy variable which equals to 1 if the sample firm is investigated by the CSRC in year t, and 0 otherwise

Enforce

Enforcement type of a sample firm that was penalized by the government in year t

GIVING

Percentile rank of donations scaled by assets of a sample firm in a year

STATE

A dummy variable which equals to 1 if the ultimate controller of the sample firm is the local government or central government, and 0 otherwise

LOCAL

A dummy variable which equals to 1 if the ultimate controller of the sample firm is the local government

CENTRAL

A dummy variable which equals to 1 if the ultimate controller of the sample firm is the central government

SIZE

Firm size, calculated as the natural logarithm of year-end total assets

LEV

Financial leverage, computed as the ratio between year-end total liabilities and total assets

TOP1

Year-end shareholding of the largest shareholder

MTB

Market value divided by the book value of total equity at year-end

ADJROA

Industry median-adjusted return on total assets of previous year

EO

A dummy variable which equals to 1 if a sample firm has an equity offering in the subsequent year, and 0 otherwise

BIG4

A dummy variable which equals to 1 if a firm is audited by a BIG4 auditor, and 0 otherwise

XLIST

A dummy variable which equals to 1 if a firm issues B-shares or H-shares, and 0 otherwise

MO

Stock ownership held by managers

BOARD

Percentage of independent directors on the board

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Qian, C., Gao, X. & Tsang, A. Corporate Philanthropy, Ownership Type, and Financial Transparency. J Bus Ethics 130, 851–867 (2015). https://doi.org/10.1007/s10551-014-2109-8

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