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Ownership identity and corporate donations: evidence from a natural experiment in China

Chun-Keung (Stan) Hoi (Rochester Institute of Technology, Rochester, New York, USA)
Jun Xiong (City University of Hong Kong, Kowloon, Hong Kong SAR)
Hong Zou (University of Hong Kong, Hong Kong SAR)

China Finance Review International

ISSN: 2044-1398

Article publication date: 18 December 2019

Issue publication date: 23 March 2020

545

Abstract

Purpose

Taking advantage of the 2008 Sichuan Great Earthquake as a natural experiment, the purpose of this paper is to examine the motives and effects of corporate donations by focusing on how firm ownership identity as the first-order governance mechanism affects the motives and effects of disaster relief donations.

Design/methodology/approach

The authors conduct regressions and market event studies, and use matching to address the confounding effects of differences in firm characteristics.

Findings

The authors hypothesize that private firms that are better governed than state-owned enterprises (SOEs) are more likely to donate for value maximization. Consistent with this, the authors find that private firms are more likely to donate to the 2008 Sichuan earthquake and donate more than SOEs. The effects of secondary governance variables in the donation determinant models (e.g. board independence and managerial ownership) are more consistent with the value maximization argument. While short-term market reaction to donation announcement is not significant for private firms, it is lower when SOEs make a large donation. Consistent with the hypothesis, the authors find that over the 24–36 months following the donation, private donors realize a higher abnormal stock return.

Research limitations/implications

The study contributes to the debate over the merits/costs of corporate donations and helps better understand how SOEs and private firms (particularly family-owned firms) differ in their governance and financial decision-making.

Practical implications

Both managers from private firms and SOEs can use the findings of this study to better guide their donation and other philanthropic decisions.

Originality/value

This study is the first to examine both the motives and effects of corporate donations by both private and SOEs taking advantage of the 2008 Sichuan, thereby significantly extending prior related studies.

Keywords

Acknowledgements

Hong Zou acknowledges the financial support from the Research Grants Council of Hong Kong Special Administrative Region, China (Project No. CityU 153510). The authors thank the Executive Editor (Wenfeng Wu) and the Associate Editor (Tong Yu), Mike Adams, Chen Lin and Jason Xiao for help comments on the paper.

Citation

Hoi, C.-K.(S)., Xiong, J. and Zou, H. (2020), "Ownership identity and corporate donations: evidence from a natural experiment in China", China Finance Review International, Vol. 10 No. 2, pp. 113-142. https://doi.org/10.1108/CFRI-11-2019-0154

Publisher

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Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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