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Principal–Principal Conflicts and Corporate Philanthropy: Evidence from Chinese Private Firms

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Abstract

The principal–principal perspective suggests that controlling shareholders have excessive influence on corporate philanthropy and may direct corporate funds to charitable causes to support their personal interests. Analysis of a sample of Chinese private firms listed on the Shenzhen or Shanghai stock exchange between 2004 and 2011 shows that (1) there is a significant and negative relationship between corporate giving and the share held by the largest shareholders, suggesting that controlling shareholders are opportunistic in directing corporate charitable contributions; (2) there is a significant and positive relationship between corporate giving and the political connections of the largest shareholders and their agents, suggesting compatibility between corporate contributions and the personal interests of the controlling shareholders; (3) there is a stronger negative relationship between corporate giving and the share of the company held by the largest shareholders in politically connected firms, suggesting that political connections contribute to increased opportunistic corporate giving. Overall, our study provides important evidence for the “one dominant controlling shareholder” phenomenon (yigududa) by testing and extending the principal–principal framework and showing that the largest shareholders of Chinese firms appear to donate to charitable causes that ultimately serve their personal interests at the expense of minority shareholders.

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Notes

  1. When the Communist Party won the civil war and founded the People’s Republic of China in 1949, it began the socialist transformation of private businesses. Between 1952 and 1977, private businesses were completely banned in China (Li et al. 2006).

  2. A private firm is a firm whose largest shareholder is an individual or a private organization while a state-owned firm is a firm with the state being the largest shareholder.

  3. Although 713 companies were controlled by private owners, 398 were state-owned enterprises at the time of IPO and were later converted to non–state-owned listed firms through takeovers (Chen et al. 2011).

  4. Donation statistics were not available until 2007, when the China Charity & Donation Information Center started to collect and publish donation data on its Web site (http://www.charity.gov.cn).

  5. These laws include Accounting Law (passed in 1985, revised in 1993 and 1999), Bankruptcy Law (passed in 1986, revised in 2006), Company Law (passed in 1993, revised in 1999 and 2005), Law of Certified Public Accountants (passed in 1993), Auditing Law (passed in 1994, revised in 2006), and Security Law (passed in 1998, revised in 2005).

  6. Data are available on the Web site: http://www.charity.gov.cn.

  7. The official listed firm information-disclosure website appointed by CSRC is cninfo.com.cn.

  8. In a widely dispersed ownership structure, shareholders’ cash-flow rights usually equal their control rights. However, in a concentrated ownership structure through a pyramid ownership scheme, the control rights of large shareholders can be much greater than their cash-flow rights. La Porta et al. (1999) and Claessens et al. (2000) provide detailed discussions of ownership structures around the world and in emerging economies, respectively.

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Acknowledgments

We gratefully acknowledge that this study is sponsored by the National Natural Science Foundation of China (Approval Numbers: 71372166 and 71272214), and the Foundation of Jinan University (Approval Number: 12JNKY003). We would also like to express our sincere appreciation to the editor, Professor Thomas Clarke, and anonymous reviewers for their constructive comments.

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Authors and Affiliations

  1. School of Accounting, Zhongnan University of Economics and Law, Wuhan, China

    Sihai Li

  2. School of Business, University of Western Sydney, Sydney, Australia

    Huiying Wu

  3. School of Management, Jinan University, Guangzhou, China

    Xianzhong Song

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  1. Sihai Li
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Correspondence to Huiying Wu.

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Li, S., Wu, H. & Song, X. Principal–Principal Conflicts and Corporate Philanthropy: Evidence from Chinese Private Firms. J Bus Ethics 141, 605–620 (2017). https://doi.org/10.1007/s10551-015-2720-3

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