How market value relates to corporate philanthropy and its assurance. The moderating effect of the business sector

• DOI: http://doi.org/10.1111/beer.12264
• Author: Lázaro Rodríguez‐Ariza,Maria Victoria López‐Pérez,Maria Carmen Pérez‐López,Lourdes Arco‐Castro
• Published date: 01 April 2020
• Date: 01 April 2020

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  wileyonlinelibrary.com/journal/beer Business Ethics: A Eur Rev. 2020;29:266–281.© 2020 John Wiley & Sons Ltd

1 | INTRODUCTION

Corporate soc ial responsibil ity (CSR) is th e voluntary co mmitment

by companies to the social development, environmental protection,

respect for f undamental ri ghts, and adop tion of open governa nce,

reconciling th e interests of st akeholders in a n overall approa ch of

quality and sustainability (Commission of the European Communities,

2001). The defin ition of CSR enco mpasses a firm's so cial perfor-

mance, includi ng its corpora te philanthropy ( Al-Tabbaa, Leach, &

March, 2014; Bramme r, Pavelin, & Porte r, 2009; Jia & Zhang , 2014),

which is define d as the set of activities vo luntarily carrie d out by the

company aimed at im proving the lives of co mmunities by ca rrying

out project s that address iss ues of public intere st and social pr ob-

lems, general ly through the provisio n of funds, time or in-kind a ssets

(Haski-Leventha l, 2013; McHugh et al., 2018; M uller & Whiteman ,

2016). Corporate phil anthropy is growing in impor tance in the busi-

ness strateg y of companies (Gautier & Pa che, 2015; Zerbini, 2017).

We consider that fir ms inform stakeholders , including investors,

about their corporate philanthropy, which reduces the information

asymmetr y between signa llers and recei vers (Muttak in, Khan, &

Subramaniam , 2015). From this persp ective, the t heoretical f rame-

work applied sh ould be signallin g theory (Spe nce, 1973), which

considers that t here is an informat ion asymmetr y between a com -

pany and its inves tors. Corporate philant hropy is then analysed as a

strategic issu e. Corporate philanthropy ac ts as a signal to investors

of trust, coop eration, and concern for sta keholders (Ba e, Masud, &

Kim, 2018; Ferreir a, 2017; Groening & Kanur i, 2018; Jo & Harjoto,

2011) or a signal of a positive im age and reputation (Moratis , 2018)

that could improve t he company's financial per formance (Bae et al.,

2018; Moratis, 2018), cre ate value in the medium an d long terms and

Received: 1 May 2019 

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  Revised: 26 Decemb er 2019 

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  Accepted: 31 Decem ber 2019

DOI: 10.1111/beer.12264

ORIGINAL ARTICLE

How market value relates to corporate philanthropy and its

assurance. The moderating effect of the business sector

Lourdes Arco-Castro | Maria Victoria López-Pérez  | Maria Carmen Pérez-López |

Lázaro Rodríguez-Ariza

Faculty of Econo my and Business, Uni versity

of Granada, G ranada, Spain

Correspondence

Maria Victo ria López-Pérez, Fac ulty of

Economy and Busi ness, Universit y of

Granada, C ampus de Cartu ja, s/n, Granada

18071, Spain .

Email: mvlopez@ugr.es

Funding information

R&D Project s. European Region al

Developmen t Fund (ERDF) Andalu sia 2014-

2020 Operat ional Program, Gr ant/Award

Number: B1-SEJ-387-UGR18

Abstract

Corporate philant hropy strategy integrated into t he core business constitutes a n ovel

vision and a little- explored field of st udy with regard to corp orate social commit-

ment. The goal of this st udy is to analyse how the di verse ways of managing and

assuring philanthro py can be considered sign als of a firm's social commitm ent and

consequently af fect its market value. In additi on, the analysis considers wheth er the

business sector m oderates those rel ationships. We aim to provide a comp rehensive

vision of corporate phila nthropy and its ef fect on market value. From a s ample of

965 firm-years, of 193 firms from 2011 to 2015, we found that t he market responds

positively to the profe ssional, independ ent management of philant hropy via a foun-

dation, in preference to d onations, and welcom es external assur ance of corporate

philanthropy as a set of ac tions that improve the perceived relia bility of philanthropic

activities. In addition, we obser ve a moderating effec t of the business secto r on the

relationships among corporate philanthropy, assurance and the company's market

value. The main contr ibution of this study is t he provision of new evidence of h ow

corporate philanth ropy and its assuran ce are effective sig nals that reduce the infor-

mation asymmetri es between firm s and investors, aff ecting company market v alue

positively.

    

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ARCO-CAS TRO eT Al.

consequently i ncrease the mar ket value (Muhamma d, Scrimgeour,

Reddy, & Abidin, 2015; Vvei nhardt & Zygmantaite, 2015).

Investors and shareholders are not the direct target of corporate

philanthropy (Cheong, Sinnakkannub, & Ramasamy, 2017), but firms

can use it as a signal of best practices to positively affect the mar-

ket. The firm sends a signal of corporate philanthropy that gener-

ates trust and allows investors to make decisions that can affect the

market positively (Muttakin et al., 2015; Zerbini, 2017). If investors

perceive, however, that corporate philanthropy is simply a tool for

marketing (Wójcik, 2018), image (Leisinger, 2007), or reputation (Liang

& Renneboog, 2017) used to satisfy managers' personal interests

(Barnea & Rubin, 2010) or compensate for bad practices (Chen, Patten,

& Roberts, 2008) there will be a negative effect on performance.

In the light of these consider ations, the fi rst o bjective of our

study is to exami ne whether corp orate philanth ropy has a positive

effect on market value. We distinguish here between discretionary

and structured corporate philanthropy. Corporate philanthropy may

comprise sporadic and discretionary practices through donations,

which usually ar e considered to respond to t he personal prefere nces

of managers (Luf farelli & Awaysheh, 2018) or be pla nned and struc-

tured through f oundations (Bereskin, Ca mpbell, & Hsu, 2016; Liang

& Renneboog, 2017).

In the form er case, managers might engage in philanthro pic

practices to o btain individual b enefits or out of pers onal motivations

(Barnea & Rubin, 2010; Prior, Surroc a, & Tribó, 20 08). Investors

could co nsider this a false signal (Cohen & Dean, 2005). In the lat-

ter case, corpo rate philanthropy is usually sup ported by specialised

organisatio nal structu res (Brammer & Mi llington, 20 03; Marquis &

Lee, 2013), increasin gly frequentl y through found ations speciall y

created or used to ma nage the social bu siness strateg y (Minciullo

& Pedrini, 2015; Waniak-Michalak & Michalak, 2016). Channelling

corporate phil anthropy through foundat ions may give it more credi-

bility with inve stors and assure a fair and obj ective decision-making

process (Liang & Re nneboog, 2017).

Our second goal is to determine whether the introduction of

mechanisms to ass ure and supervise a fir m's corporate philanthropy

has any effect o n its market value, on the assum ption that if the in-

formation abou t such corporate p hilanthropy is not s upervised , its

credibility m ay be questione d (Kolk & Perego, 2010). Thus , the as-

surance of corpo rate philanthropy, aimed at eva luating the quality o f

sustainabil ity repor ts (Glo bal Repor ting Initiat ive, 2013), supposes

an added value (B oiral, Heras-Sai zarbitoria, & Br otherton, 2019).

Assurance c an enhance the credibil ity of the practice s (Cui, Jo, & Na,

2018). These assura nce mechanisms may be inter nal and/or external

to firms (Becker, 2018). Thei r existence provi des securit y to inves-

tors and theref ore should posit ively affect m arket value, with t he

internal mechanis ms acting as indicators of good governance (Darko,

Aribi, & Uzonwanne , 2016) and the extern al ones underpi nning

the reliability of the outcomes reported (International Federation

of Accountants , 2012). Although p revious researc h has generally

studied these mechanisms separately (Chen & Lin, 2015; Peterson

& Su, 2017), in this pape r, they were analysed as t hough both as-

surance mecha nisms were perceived as signals of ef fectiveness and

guarantee (Bae e t al., 2018) and positi vely influenced t he market's

assessment of company value.

Third, we analyse the moderating effect of the business sector,

both on the relationship between corporate philanthropy and market

value and on that between external and internal assurance and mar-

ket value. We hypothesise that the effect of channelling, managing,

and assuring philanthropy may be reinforced by the sector in which

the company operates (Peterson & Su, 2017; Sierra, Zorio, & García-

Benau, 2013). The demands of social practices often differ by sector.

To meet the research obj ectives, we pe rformed a pan el data

model to 965 firm-year s, observi ng 193 European firms fr om thir-

teen countries i n the period 2011–2015, after the finan cial crisis,

once the economy wa s more stable.

The paper contributes to the study of the relationship between

CSR and financial performance, focusing on corporate philanthropy

considered from a strategic point of view. This approach is novel since

philanthropy has generally been treated as an element of legitimis-

ation but not as a strategy integrated into the core business (Liang

& Renneboog, 2017). This study belongs to the group of researchers

who argue that corporate philanthropy and its assurance are deliber-

ate actions to signal information to the market about the characteris-

tics of the company and indirectly affect market value (Chang, Jo, &

Li, 2018; Zolotoy, O'Sullivan, & Klein, 2019). The research explores

how corporate philanthropy is articulated and how investors perceive

its quality, consistency, and effectiveness and take these factors into

account in their decision making, positively affecting market value.

Investors thus appreciate that corporate philanthropy is structured

and managed through foundations, as opposed to donations. Similarly,

the external assurance of corporate philanthropy is valued positively

by the market. The results show that corporate philanthropy and its

assurance, when managed strategically, are signals of reliability and

effectiveness that reduce the information asymmetries between firms

and their investors, increasing investor confidence in the company and

affecting market value. In addition, the sector of the company's oper-

ations plays a moderating role in the relationship among corporative

philanthropy, assurance, and market value, showing that different sec-

tors evaluate the followed strategies differently. These results should

be taken into account when introducing corporate philanthropy strat-

egies in companies.

The rest of this paper is organised as follows. In the next section,

we review the literature and propose the study hypotheses. In section

three, the data and estimation method are presented, after which the

results obtained are presented. The fifth and final section analyses and

discusses the results and summarises the main conclusions drawn.

2 | LITERATURE RE VIEW AND STUDY

HYPOTHESES

2.1 | Theoretical framework

The present st udy adopts sig nalling theor y, which is applicab le in

scenarios wher e two parties have diffe rent amounts of informatio n.