Article

Can Socially Responsible Firms Survive Competition? An Analysis of Corporate Employee Matching Grants

Authors:
To read the full-text of this research, you can request a copy directly from the authors.

Abstract

Fifty-five percent of S&P 500 firms have employee matching grant schemes. Matching grants act as a coordination mechanism which reduces free-riding by socially conscious employee-donors who value a public good but prefer someone else to pay for it. The popularity of matching schemes demonstrates that socially responsible firms can survive market competition. Our model shows that such schemes can enhance the welfare of socially conscious employees and raise more for charities without reducing profits for investors in firms operating in competitive labor and capital markets. This will be so provided socially conscious employees are either more productive or value working together. We document that labor productivity is higher at firms with matching schemes and that these firms are also more likely to be ranked as one of the “100 Best Companies to Work for.”

No full-text available

Request Full-text Paper PDF

To read the full-text of this research,
you can request a copy directly from the authors.

... Many studies found that CSR can improve financial performance through a variety of channels, such as labor reputation [3], customer awareness [4], labor productivity [5], mutual monitoring [6], CSR-contingent executive compensation [7], and reduction of cost equity capital [8]. In addition, previous studies pertaining to sustainability management focused on the relevance of sustainability management to earnings management, corporate risk, and firm value. ...
Article
Full-text available
This study examines the association of corporate sustainability management with earnings transparency. Based on previous studies that indicate that sustainability management activities reduce earnings management and corporate risk and increase a firm’s value, this study predicts that the firms with effective sustainability management will have a high earnings transparency. In addition, this study examines the differential effect of corporate sustainability management on earnings transparency according to whether or not a firm belongs to a chaebol. We use Environmental, Social, and Governance (ESG) ratings of the Korean Corporate Governance Service (KCGS) as a proxy for corporate sustainability management and apply the method of Cheng and Subramanyam (2008) to measure earnings transparency. The empirical results show that there is a significant positive relationship between corporate sustainability management and earnings transparency. Furthermore, the association between corporate sustainability management and earnings transparency is more negative for firms belonging to a chaebol. These results indirectly show that firms belonging to a chaebol have a lower level of information asymmetry than firms not belonging to a chaebol. This study focuses on corporate sustainability management as a determinant of earnings transparency, and is useful for examining the effect of belonging to a chaebol on the relationship between sustainability management and earnings transparency. Our results are expected to provide important implications not only for managers, but also for investors and regulators.
... Looking at other performance metrics, McGuire et al. [3] found significant correlations between social responsibility and return on assets (ROA), Debt/Assets, Beta and standard deviation of total returns. More recent studies focus on different aspects of CSR and their impacts on firm outcomes, including labor reputation [18], customer awareness [19], labor productivity [20] and improved transparency [21]. In this study, we attempt to use numerous firm and executive characteristics to determine if consistent results can be obtained. ...
Article
Full-text available
Outside of direct ownership, the general public may feel it is an implicit stakeholder of a firm. As the public becomes more vested in a firm’s actions, the firm may be more likely to engage in Corporate Social Responsibility (CSR) activities. We proxy for the public’s stake in a firm with public visibility. Based on 3400 unique newspaper publications from 1994–2008, we measure visibility for the S&P 500 firms with the frequency of print articles per year concerning the firm. We find that visibility has a signficant, positive relationship with the CSR rating. Evidence also suggests this relationship may be causal and working in one direction, from visibility to CSR. While the existing literature provides other factors that influence CSR, visibility proves to have the most significant impact when tested alongside those other factors. Visibility also has a mediating effect on the relationship between CSR rating and firm size. CSR rating and firm size relate negatively for the lowest visibility firms and positively for the highest. This paper provides strong evidence that visibility is an important factor to consider for studies on corporate social performance.
... The research on the relationship between CSR and CFP is saturated (e.g., References [13,14]). Many studies found that CSR can improve CFP through a variety of channels, such as labor reputation [15], customer awareness [16], labor productivity [17], and improved transparency [18]. Some studies found a negative relationship (e.g., Reference [19]), citing an agency problem or shareholder-stakeholder conflicts. ...
Article
Full-text available
This paper empirically studies the connection between earnings management and corporate social performance, conditional on the existence of CSR-contingent executive compensation contracts, an emerging practice to link executive compensation to corporate social performance. We find that executives are more likely to manipulate earnings to achieve their personal compensation goals when CSR rating is low, as well as their CSR-contingent compensation. Because of public pressure on their excessive total compensation, corporate executives see no need to manipulate earnings to increase compensation when their CSR-contingent compensation is already high. Our results suggest that earnings management and CSR-contingent compensation are substitute tools to serve the interests of executives, which is an agency problem that was never previously studied. Additionally, we explore how managerial characteristics affect earnings management, driven by the incentive effects of CSR-linked compensation.
... Research on the company's perspective is somewhat more diverse. More precisely, one group of authors analyses the relationship between CSR and non-financial dimensions, such as the preciseness of earnings forecasting (Becchetti et al., 2013), legal protection of shareholder rights (Ferrell et al., 2016) or employee satisfaction (Gong and Grundy, 2017). However, most financial research on CSR asks about its influence on business valuation. ...
... have long recognized the incentive effects of matching in mitigating free-rider problems in the supply a public good (See Guttman (1978, 1985, 1986, 1987), Danziger and Schnytzer (1991), Varian (1994) and Boadway et al. (2007) for the role of matching in reducing free-riding behavior in the provision of public goods). Gong and Grundy (2011) study how corporate matching grant schemes can coordinate donations from socially conscious employees. ...
Article
Charities and large donors can disagree about whether the benefactor’s gift should be packaged as seed money or a matching grant. Fixing the size of the large donation, matching schemes always raise more money and are preferred by both charities and benefactors. But when the large donor chooses the size of her donation and small donors decrease their giving at higher match ratios (as Karlin and List (2007) document), then a conflict can arise. The benefactor can prefer a smaller leadership gift and more reliance on small donor matching while the non-profit organization can prefer seed money.
Article
Very few studies verified whether Socially Responsible Investments (SRIs) add value during a financial turmoil. We fill this gap. We conduct the analysis by employing the Fama and French (2015) five‐factor model along with the usual Fama and French's (1993) and Carhart's (1997) models. We also propose an innovative methodology that takes into consideration the higher moments of the explanatory variables in order to deal with the non‐normality and the heteroskedasticity of return distributions. Rather than inspecting Socially Responsible (SR) mutual funds as done by most of the existent literature, we concentrate on SR indexes, in the conviction to overcome some of the limitations that can potentially bias an analysis carried out on mutual funds. Our results show that both SR and conventional indexes performed almost in the same way independently of the financial market conditions. Little evidence can at best support the conclusion that SRIs dampened the downside risk during the recent financial crisis in North America only. At the same time, SRIs do not seem to suffer from a risk‐adjusted perspective during normal times. As expected, SRIs bear a higher level of idiosyncratic volatility compared to their respective conventional investments. Our innovative methodology plays an important role in explaining the cross section of SR returns.
Article
Social investors often incorporate elements of stakeholder theory into their work. Many believe that firms with good stakeholder relationships should be viewed as better managed and therefore likely to offer superior financial performance. Empirical research has strengthened the case for a correlation between good stakeholder management and superior firm-level financial outcomes. These findings strongly suggest that a stakeholder worldview has validity, and that analyzing stakeholder relationships can aid in investment analysis. Although many theoretical approaches are available, a modified form of instrumental stakeholder theory seems to fit best with the needs of investors. In this framework, good management may be defined as the efficient allocation of resources to stakeholder management such that a large surplus remains for owners and managers. Stakeholder analysis of this type aids in assessing management quality and clarifies the relationships among stakeholders, owners, and managers. The resulting insights are often relevant for the valuation of the firm. Stakeholder analysis therefore has the potential to improve fundamental analysis, and stakeholder relationships deserve the attention not just of social investors, but of managers and investors in general.
Article
Full-text available
This article examines the rapidly expanding movement to professionalize the corporate contributions function, linking giving to special events in sports and the arts, and the pressures to reorient philanthropy into a bottom-line function. Philanthropy has become big business. Sponsorship of sports events, concerts, and festivals has become an $850 million industry with more than 1600 corporate participants. Corporate sponsorships of sporting events have tripled in the past two years alone. Additionally, businesses contribute more than $500 million annually to the arts, representing a four-fold increase in the past decade. The management of corporate philanthropy has become an integral component of the strategic-planning process.
Article
Full-text available
Each year, since 1998, Fortune magazine has published a list of firms deemed the “100 Best Companies to Work for in America” based on their superior employer-employee relations. This relationship represents an intangible asset that may significantly influence future firm performance. We investigate whether investment strategies that invest in the 100 Best are able to outperform the market. The results indicate that portfolios, consisting of firms on the list, offer higher risk adjusted returns than the S&P 500 over the period 1998-2005.
Article
Full-text available
Consumers respond positively to products tied to charity, particularly from sellers that are relatively new and hence have limited alternative means of assuring quality. We establish this result using data from a diverse group of eBay sellers who “experiment” with charity by varying the presence of a donation in a set of otherwise matched product listings. Most of charity's benefits accrue to sellers without extensive eBay histories. Consistent with charity serving as a quality signal, we find fewer customer complaints among charity-intensive sellers.
Article
Full-text available
This paper explores the effect of exclusionary ethical investing on corporate behavior in a risk-averse, equilibrium setting. While arguments exist that ethical investing can influence a firm's cost of capital, and so affect investment, no equilibrium model has been presented to do so. We show that exclusionary ethical investing leads to polluting firms being held by fewer investors since green investors eschew polluting firms' stock. This lack of risk sharing among non-green investors leads to lower stock prices for polluting firms, thus raising their cost of capital. If the higher cost of capital more than overcomes a cost of reforming (i.e., a polluting firm cleaning up its activities), then polluting firms will become socially responsible because of exclusionary ethical investing. A key determinant of the incentive for polluting firms to reform is the fraction of funds controlled by green investors. In our model, empirically reasonable parameter estimates indicate, that more than 20 % green investors are required to induce any polluting firmss to reform. Existing empirical evidence indicates that at most 10% of funds are invested by green investors.
Article
Full-text available
We consider a general model of the non-cooperative provision of a public good. Under very weak assumptions there will always exist a unique Nash equilibrium in our model. A small redistribution of wealth among the contributing consumers will not change the equilibrium amount of the public good. However, larger redistributions of wealth will change the set of contributors and thereby change the equilibrium provision of the public good. We are able to characterize the properties and the comparative statics of the equilibrium in a quite complete way and to analyze the extent to which government provision of a public good ‘crowds out’ private contributions.
Article
Full-text available
Society's demands for individual and corporate social responsibility as an alternative response to market and distributive failures are becoming increasingly prominent. We first draw on recent developments in the 'psychology and economics' of prosocial behavior to shed light on this trend, which reflects a complex interplay of genuine altruism, social or self image concerns, and material incentives. We then link individual concerns to corporate social responsibility, contrasting three possible understandings of the term: the adoption of a more long-term perspective by firms, the delegated exercise of prosocial behavior on behalf of stakeholders, and insider-initiated corporate philanthropy. For both individuals and firms we discuss the benefits, costs and limits of socially responsible behavior as a means to further societal goals.
Article
Full-text available
A new theory of altruistic corporate social responsibility is developed. Firms that advertise their social and environmental good works in effect solicit charitable contributions from customers, employees, investors and other stakeholders. They compete with not-for-profits in the market to supply public and altruistic goods. To analyze how corporate altruism affects firm valuations, a model is developed in which investors gain utility both from personal consumption and from making donations to worthy causes. A share in a ``responsible'' firm is a charity-investment bundle. When individuals view corporations and not-for-profits as equally competent suppliers of charity-related ``warm glow,'' small changes in firms' social policies induce exactly offsetting changes in individuals' portfolio choices. There is no effect on firm valuations, and no change in the aggregate supply of good works. When a sizable fraction of investors prefer corporate philanthropy over direct charitable giving (e.g., to avoid taxation of corporate profits), firm valuations will be maximized by following social policies that involve strictly positive levels of corporate altruism.
Article
Full-text available
Incl. bibl. Some essays in this volume were presented at a Workshop organized at the World Bank in April 1997.
Article
Full-text available
This paper was stimulated by a paper by Peter Ware, who used calculus first-order conditons to show that a redistribution of income that does not change the set of voluntary contributors leaves the supply of public goods unchanged. In general, redistributions can change the set of contributors and also the supply of public goods. But we show that even in the general case there are some remarkably sharp comparative statics results.
Article
Full-text available
Models of giving have often been based on altruism. Examples include charity and intergenerational transfers. The literatures on both subjects have centered around neutrality hypotheses: charity is subject to complete crowding out, while intergenerational transfers are subject to Ricardian equivalence. This paper formally develops a model of giving in which altruism is not "pure." In particular, people are assumed to get a "warm glow" from giving. Contrary to the previous literature, this model generates identifiable comparative statics results that show that crowding out of charity is incomplete and that government debt will have Keynesian effects. Copyright 1989 by University of Chicago Press.
Article
Full-text available
We conducted a natural field experiment to explore the effect of price changes on charitable contributions. To operationalize our tests, we examine whether an offer to match contributions to a non-profit organization changes the likelihood and amount that an individual donates. Direct mail solicitations were sent to over 50,000 prior donors. We find that the match offer increases both the revenue per solicitation and the probability that an individual donates. While comparisons of the match treatments and the control group consistently reveal this pattern, larger match ratios (i.e., $3:$1 and $2:$1) relative to smaller match ratios ($1:$1) had no additional impact. The results have clear implications for practitioners in the design of fundraising campaigns and provide avenues for future empirical and theoretical work on charitable giving. Further, the data provide an interesting test of important methods used in cost-benefit analysis.
Article
Full-text available
Economists have long observed that crowding out of government grants to private charities is incomplete. The accepted belief is that givers treat the grants as imperfect substitutes for private giving. We theoretically and empirically investigate a second reason: the strategic response of a charity will be to reduce fund-raising efforts after receiving a grant. Employing panel data from arts and social service organizations, we find that government grants cause significant reductions in fund-raising. This adds a new dimension to the policy discussions - analysts should account for the behavioral responses of the charity, as well as the donors, to government grants.
Article
Full-text available
In this paper, we consider the Coase theorem in a non cooperative game framework. In particular, we explore the robustness of the Coase theorem with respect to the ?nal distribution of alienable property rights which constitutes, as far as we know, a less cultivated ?eld of research. In our framework, in order to reach e� ciency, agents have to stipulate binding contracts. In the analysis, we distinguish between permanent and temporary contracts showing the di�erent implication of the two kinds of contracts with respect to the ?nal attribution of individual rights. More precisely, we show that, with temporary binding contracts and under particular assumptions, the ?nal attribution if individual rights does not converge.
Article
Full-text available
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
Article
During the last decade there has been increased scrutiny of corporate performance on dimensions other than stock price. For example, many market participants now pay close attention to firms' environmental, social, and governance (ESG) or corporate social responsibility (CSR) policies. We examine the extent to which a widely-used measure of firms' ESG performance is related to firms' operating performance, efficiency, compensation practices, trading by institutional investors, and ultimately, valuation. Our goal is to better understand why firms typically adopt stronger ESG policies and the extent to which the market values or trades on these decisions. We find that operating performance, efficiency, and firm value tend to increase with stronger ESG performance. We also find that CEOs who adopt stronger ESG policies receive lower unexplained salary compensation than their peers. Taken together, these results suggest that firms with stronger ESG policies also enjoy increased efficiency and higher valuations than their peers. However, we find no evidence that the valuation effects are driven by institutional trading – if anything, it appears that institutional investors are less likely to own or buy more shares of stronger environmental or socially responsible firms. At the same time, however, we observe that institutions do appear to prefer firms with fewer corporate governance concerns.
Article
Charities and large donors can disagree about whether the benefactor’s gift should be packaged as seed money or a matching grant. Fixing the size of the large donation, matching schemes always raise more money and are preferred by both charities and benefactors. But when the large donor chooses the size of her donation and small donors decrease their giving at higher match ratios (as Karlin and List (2007) document), then a conflict can arise. The benefactor can prefer a smaller leadership gift and more reliance on small donor matching while the non-profit organization can prefer seed money.
Article
This paper examines whether firms in non-competitive industries benefit relatively more from good governance than do firms in competitive industries. Consistent with this hypothesis, we find that weak governance firms, as measured by the G-index, have lower equity returns, worse operating performance, and lower firm value, but only so in non-competitive industries. When we examine the nature of the underlying agency cost, we find that weak governance firms have lower labor productivity, higher input costs, and make more value-destroying acquisitions, but, again, only so in non-competitive industries. We also find that weak governance firms in non-competitive industries are more likely to be targeted by activist hedge funds, suggesting that investors are taking actions to mitigate the inefficiency.
Article
We model a market in which some investors get utility from owning shares of firms that engage in corporate social responsibility (CSR). In equilibrium, investors' CSR considerations influence portfolio choices, stock prices, and CSR spending. We study tax policy designed to maximize total giving (individual and corporate) net of government tax breaks and find that its effectiveness is non-monotonic in the proportion of altruistic investors: with few or many altruistic investors, it has little impact on giving, but, at intermediate levels, effective tax policy intuitively relates the corporate tax rebate rate on giving and the cap on allowable tax savings. Responsabilité sociale des sociétés, prix des actions et politique fiscale. On présente un modèle dans lequel certains investisseurs ont une préférence pour la possession d'actions d'entreprises qui acceptent une responsabilité sociale. En équilibre, l'intérêt des investisseurs pour la responsabilité sociale influence les choix de portefeuilles, le prix des actions, et les dépenses au chapitre de la responsabilité sociale. On étudie la politique fiscale cherchant à maximiser les dons totaux (individuels et corporatifs) en sus des déductions fiscales permises par les gouvernements, et on découvre que son impact n'est pas monotone par rapport à la proportion des investisseurs altruistes : quand il y a peu ou beaucoup d'investisseurs altruistes, cette politique a peu d'impact sur les dons; aux niveaux intermédiaires, une politique fiscale effective relie les taux de déductions fiscales permises sur les dons et le maximum permis d'épargnes fiscales intuitivement.
Article
In this paper, we investigate whether superior performance on corporate social responsibility (CSR) strategies leads to better access to finance. We hypothesize that better access to finance can be attributed to a) reduced agency costs due to enhanced stakeholder engagement and b) reduced informational asymmetry due to increased transparency. Using a large cross-section of firms, we find that firms with better CSR performance face significantly lower capital constraints. Moreover, we provide evidence that both of the hypothesized mechanisms, better stakeholder engagement and transparency around CSR performance, are important in reducing capital constraints. The results are further confirmed using several alternative measures of capital constraints, a paired analysis based on a ratings shock to CSR performance, an instrumental variables and also a simultaneous equations approach. Finally, we show that the relation is driven by both the social and the environmental dimension of CSR.
Article
In this paper we examine the market reaction to the announcement by Fortune of the ‘Best 100 Companies to Work for in America.’ Employees rate firms based on several criteria including trust in management, pride in work/company and camaraderie. To examine long-term performance, we calculate raw and risk-adjusted returns and then compare them to the returns of a matched sample of firms. In addition, we calculate the return on a buy and hold investment in the sample firm less the return on a buy-and-hold investment in a matched sample firm (BHARs). We find a statistically significant positive response to the announcement of the ‘100 best companies to work for’ by Fortune. Also, based on all measures of risk-adjusted return, we find these firms generally outperform the matched sample of companies. The BHAR results, although not exhibiting the level of statistical significance, are consistent with the raw and risk-adjusted return results.
Article
This study examines the impact of corporate philanthropy growth on sales growth using a large sample of charitable contributions made by U.S. public companies from 1989 through 2000. Applying Granger causality tests, we find that charitable contributions are significantly associated with future revenue, whereas the association between revenue and future contributions is marginally significant at best. We then identify the mechanism underlying our findings. Our results are particularly pronounced for firms that are highly sensitive to consumer perception, where individual consumers are the predominant customers. In addition, we document a positive relationship between contributions and customer satisfaction. Overall, our evidence suggests that corporate philanthropy, under certain circumstances, furthers firms' economic objectives. Copyright © 2009 John Wiley & Sons, Ltd.
Chapter
When I hear businessmen speak eloquently about the “social responsibilities of business in a free-enterprise system”, I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free enterprise when they declaim that business is not concerned “merely” with profit but also with promoting desirable “social” ends; that business has a “social conscience” and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are — or would be if they or anyone else took them seriously -preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.
Article
This paper analyzes a two-stage game for implementing Lindahl's voluntary-exchange mechanism. The game is based on a model of matching behavior suggested by Guttman (1978). Both the price and the quantities purchased of the public good are individualized, and Lindahl prices emerge endogenously in the first stage of the game. It is shown that any perfect equilibrium with a positive provision of the public good is a Lindahl equilibrium. There might also exist nonprovision perfect equilibria that are Pareto dominated by Lindahl equilibria with positive provision of the public good.
Article
This paper analyzes the relationship between employee satisfaction and long-run stock returns. A value-weighted portfolio of the “100 Best Companies to Work For in America” earned an annual four-factor alpha of 3.5% from 1984 to 2009, and 2.1% above industry benchmarks. The results are robust to controls for firm characteristics, different weighting methodologies, and the removal of outliers. The Best Companies also exhibited significantly more positive earnings surprises and announcement returns. These findings have three main implications. First, consistent with human capital-centered theories of the firm, employee satisfaction is positively correlated with shareholder returns and need not represent managerial slack. Second, the stock market does not fully value intangibles, even when independently verified by a highly public survey on large firms. Third, certain socially responsible investing (SRI) screens may improve investment returns.
Article
Corporate social responsibility can improve firms’ ability to recruit highly motivated employees. This can secure socially responsible firms’ survival even in a highly competitive environment. We show that if both socially responsible (green) and non-responsible (brown) firms exist in equilibrium, workers with high moral motivation, who shirk less than others, will self-select into the green firms. If unobservable effort is sufficiently important for firm productivity, this can drive every brown firm out of business—even in the case where many workers have no moral motivation whatsoever.
Article
We study corporate philanthropy using an original database that includes firm-level data on dollar giving, giving priorities, governance, and managerial involvement in giving programs. Results provide some support for the theory that giving enhances shareholder value, as firms in the same industry tend to adopt similar giving practices and firms that advertise more intensively also give more to charity. But much of our evidence indicates that agency costs play a prominent role in explaining corporate giving. Firms with larger boards of directors are associated with significantly more cash giving and with the establishment of corporate foundations. Consistent with effective monitoring by creditors, firms with higher debt-to-value ratios give less cash to charities and are less likely to establish foundations. The empirical work considers the impact of industry regulation on giving and controls for state philanthropy laws and fiduciary responsibility laws.
Article
When a single public good is provided at positive levels by private individuals, its provision is unaffected by a redistribution of income. This holds regardless of differences in individual preferences and despite differences in marginal propensities to contribute to the public good.
Article
Estimates of the cost of equity for industries are imprecise. Standard errors of more than 3.0% per year are typical for both the CAPM and the three-factor model of Fama and French (1993). These large standard errors are the result of(i) uncertainty about true factor risk premiums and (ii) imp ecise estimates of the loadings of industries on the risk factors. Estimates of the cost of equity for firms and projects are surely even less precise.
Article
When private charity exists and is motivated by utility interdependence a non-Pareto optimal outcome, the ‘free-rider’ problem, typically arises. Nevertheless, incremental fiscal redistribution cannot achieve a Paretian welfare improvement so long as private charity continues at positive levels. Donors respond to incremental fiscal redistribution by reducing their voluntary contributions by exactly a dollar for every dollar transferred in this way. No net transfer is achieved unless incremental fiscal redistribution is pursued to the point where private contributions have been driven to zero. Alternatively, a net transfer may be achieved by fiscal measures which affect donors' marginal incentives to donate.
Article
We derive the optimal labor contract for a levered firm in an economy with perfectly competitive capital and labor markets. Employees become entrenched under this contract and so face large human costs of bankruptcy. The firm's optimal capital structure therefore depends on the trade-off between these human costs and the tax benefits of debt. Optimal debt levels consistent with those observed in practice emerge without relying on frictions such as moral hazard or asymmetric information. Consistent with empirical evidence, persistent idiosyncratic differences in leverage across firms also result. In addition, wages should have explanatory power for firm leverage. Copyright (c) 2010 the American Finance Association.
Article
We analyze how the work ethic of managers impacts a firm's employment contracts, riskiness, growth potential, and organizational structure. Flat contracts are optimal for diligent managers because they reduce risk-sharing costs, but they attract egoistic agents who shirk and unskilled agents who add no value. Stable, bureaucratic firms with low growth potential are more likely to gain value from managerial diligence. Firms that hire from a virtuous pool of agents are more conservative in their investments and have a horizontal corporate structure. Our theory also yields several testable implications that distinguish it from standard agency models. Copyright (c) 2009 the American Finance Association.
Article
We investigate the relationship between a firm's degree of social responsibility and its performance. To accomplish this objective, we examine the stock market reaction to the announcement of Fortune magazine's list of 100 Best Companies to Work For over the 1998-2003 period. We find significant positive excess returns, which indicate that being included on the list is viewed positively by the stock market. To explain the positive abnormal performance, we regress the excess returns against firm-specific variables. Excess return has a positive relation to the job growth rate, but not to firm rank, on a pre-listing basis. However, the additional analysis reveals that the firms with a more favourable ranking are relatively small and have a higher job growth rate, low employee turnover, high betas and extremely positive stock market performance prior to their inclusion on the list. In the year following the publication, sample firms with a favourable ranking have higher sales and gross profit margin than their lower-ranked counterparts. Overall, the results indicate that firms exhibiting a high degree of social responsibility towards their employees are positively rewarded by stock market participants, and that the rankings are somewhat related to pre- and post-survey financial performance.
Article
I study large charitable stock gifts by Chairmen and Chief Executive Officers (CEOs) of public companies. These gifts, which are not subject to insider trading law, often occur just before sharp declines in their companies' share prices. This timing is more pronounced when executives donate their own shares to their own family foundations. Evidence related to reporting delays and seasonal patterns suggests that some CEOs fraudulently backdate stock gifts to increase personal income tax benefits. CEOs' family foundations hold donated stock for long periods rather than diversifying, permitting CEOs to continue voting the shares.
Article
This paper identifies and evaluates rationales for team participation and for the effects of team composition on productivity using novel data from a garment plant that shifted from individual piece rate to group piece rate production over three years. The adoption of teams at the plant improved worker productivity by 14 percent on average. Productivity improvement was greatest for the earliest teams and diminished as more workers engaged in team production, providing support for the view that teams utilize collaborative skills, which are less valuable in individual production. High-productivity workers tended to join teams first, despite a loss in earnings in many cases, suggesting nonpecuniary benefits associated with teamwork. Finally, more heterogeneous teams were more productive, with average ability held constant, which is consistent with explanations emphasizing mutual team learning and intrateam bargaining.
Article
This paper explores whether corporate contributions should be tax dedu ctible within the more general context of an examination of the profi t and utility maximization motives driving contributions. The theoret ical section develops a formal structural model of the contributions process, illustrates comparative statics, and derives a set of empiri cally-testable hypotheses. Using a new source of firm data, the empir ical results indicate that profit maximization is an important motive driving contributions. This finding supports the current tax-deducti ble status of contributions (up to a seldom-encoun-tered ceiling) and favors a reform that allows firms to treat contributions as ordinary business expenses. Copyright 1988 by the University of Chicago.
Article
Shareholder rights vary across firms. Using the incidence of 24 governance rules, we construct a "Governance Index" to proxy for the level of shareholder rights at about 1500 large firms during the 1990s. An investment strategy that bought firms in the lowest decile of the index (strongest rights) and sold firms in the highest decile of the index (weakest rights) would have earned abnormal returns of 8.5 percent per year during the sample period. We find that firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures, and made fewer corporate acquisitions. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology
Article
In corporate finance and asset pricing empirical work, researchers are often confronted with panel data. In these data sets, the residuals may be correlated across firms or across time, and OLS standard errors can be biased. Historically, researchers in the two literatures have used different solutions to this problem. This paper examines the different methods used in the literature and explains when the different methods yield the same (and correct) standard errors and when they diverge. The intent is to provide intuition as to why the different approaches sometimes give different answers and give researchers guidance for their use. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
Article
This paper carries out an empirical assessment of the relationship between social capital and labour productivity in small and medium enterprises in Italy. By means of structural equations models, the analysis investigates the effect of different aspects of the multifaceted concept of social capital. While the bonding social capital of strong family ties seems to be irrelevant, the bridging social capital of weak ties connecting friends and acquaintances is proved to exert a significant and positive influence both on labour productivity and on human development.
Article
This paper provides an introduction to the concept of social capital, and carries out a critical review of the empirical literature on social capital and economic development. The survey points out six main weaknesses affecting the empirics of social capital. Identified weaknesses are then used to analyze, in a critical perspective, some prominent empirical studies and new interesting researches published in last two years. The need emerges to acknowledge, also within the empirical research, the multidimensional, context-dependent and dynamic nature of social capital. The survey also underlines that, although it has gained a certain popularity in the empirical research, the use of “indirect” indicators may be misleading. Such measures do not represent social capital’s key components identified by the theoretical literature, and their use causes a considerable confusion about what social capital is, as distinct from its outcomes, and what the relationship between social capital and its outcomes may be. Research reliant upon an outcome of social capital as an indicator of it will necessarily find social capital to be related to that outcome. This paper suggests to focus the empirical research firstly on the “structural” aspects of the concept, therefore excluding by the measurement toolbox all indicators referring to social capital’s supposed outcomes.
Article
The U.S. system of allocating investment capital is failing, putting American companies at a serious disadvantage and threatening the long-term growth of the nation's economy. The problem, says Michael Porter, goes beyond the usual formulation of the issue: accusations of "short-termism" by U.S. managers, ineffective corporate governance by directors, or a high cost of capital. The problem involves the external capital allocation system by which capital is provided to companies, as well as the system by which companies allocate capital internally. America's system is marked by fluid capital and a financial focus. Other countries--notably Japan and Germany--have systems with dedicated capital and a focus on corporate position. In global competition, where investment increasingly determines a company's capacity to upgrade and innovate, the U.S. system does not measure up. These conclusions come out of a two-year research project sponsored by the Harvard Business School and the Council on Competitiveness. Porter recommends five far-reaching reforms to make the U.S. system superior to Japan's and Germany's: 1. Improve the present macroeconomic environment. 2. Expand true ownership throughout the system so that directors, managers, employees, and even customers and suppliers hold positions as owners. 3. Align the goals of capital providers, corporations, directors, managers, employees, customers, suppliers, and society. 4. Improve the information used in decision making. 5. Foster more productive modes of interaction and influence among capital providers, corporations, and business units.
Article
The past twenty years have seen great theoretical and empirical advances in the field of corporate finance. Whereas once the subject addressed mainly the financing of corporations--equity, debt, and valuation--today it also embraces crucial issues of governance, liquidity, risk management, relationships between banks and corporations, and the macroeconomic impact of corporations. However, this progress has left in its wake a jumbled array of concepts and models that students are often hard put to make sense of. Here, one of the world's leading economists offers a lucid, unified, and comprehensive introduction to modern corporate finance theory. Jean Tirole builds his landmark book around a single model, using an incentive or contract theory approach. Filling a major gap in the field, The Theory of Corporate Finance is an indispensable resource for graduate and advanced undergraduate students as well as researchers of corporate finance, industrial organization, political economy, development, and macroeconomics. Tirole conveys the organizing principles that structure the analysis of today's key management and public policy issues, such as the reform of corporate governance and auditing; the role of private equity, financial markets, and takeovers; the efficient determination of leverage, dividends, liquidity, and risk management; and the design of managerial incentive packages. He weaves empirical studies into the book's theoretical analysis. And he places the corporation in its broader environment, both microeconomic and macroeconomic, and examines the two-way interaction between the corporate environment and institutions. Setting a new milestone in the field, The Theory of Corporate Finance will be the authoritative text for years to come.
Article
This essay looks at the literature on social capital from the perspective of game theory. It reviews Bowling Alone by Robert Putnam and Social Capital: A Multifaceted Approach edited by Partha Dasgupta and Ismail Serageldin.
Article
Theoretical interest has recently centered on the interaction of self-interested actors in the voluntary provision of a public good. This paper tests three proposed models against each other in the process of explaining differences between firms in political campaign contributions. The Cournot model of collective action is rejected for the interaction of the observed firms.
Article
We conducted a natural field experiment to further our understanding of the economics of charity. Using direct mail solicitations to over 50,000 prior donors of a nonprofit organization, we tested the effectiveness of a matching grant on charitable giving. We find that the match offer increases both the revenue per solicitation and the response rate. Larger match ratios (i.e., $3:$1 and $2:$1) relative to a smaller match ratio ($1:$1) had no additional impact, however. The results provide avenues for future empirical and theoretical work on charitable giving, cost-benefit analysis, and the private provision of public goods. (JEL D64, L31)
Article
The interests and incentives of managers and shareholders conflict over such issues as the optimal size of the firm and the payment of cash to shareholders. These conflicts are especially severe in firms with large free cash flows--more cash than profitable investment opportunities. The theory developed here explains 1) the benefits of debt in reducing agency costs of free cash flows, 2) how debt can substitute for dividends, 3) why diversification programs are more likely to generate losses than takeovers or expansion in the same line of business or liquidation-motivated takeovers, 4) why the factors generating takeover activity in such diverse activities as broadcasting and tobacco are similar to those in oil, and 5) why bidders and some targets tend to perform abnormally well prior to takeover.
Article
The discovery of five neutralities surprised the economics profession and forced the re-thinking of macroeconomic theory. Those neutralities are: the independence of consumption and current income (given wealth); the independence of investment and finance decisions (the Modigliani- Miller theorem); inflation stability only at the natural rate of unemployment; the ineffectiveness of macro stabilization policy with rational expectations; and Ricardian equivalence. However, each of these surprise results occurs because of missing motivation. The neutralities no longer occur if decision makers have natural norms for how they should behave. This lecture suggests a new agenda for macroeconomics with inclusion of those norms.
A Positive Model of Private Charities and Public TransfersThe Empirics of Social Capital and Economic Development: A Critical Perspective
  • R D Roberts
Roberts, R.D., 1984, “A Positive Model of Private Charities and Public Transfers,” Journal of Political Economy 92, 136-148. r30 Sabatini, F., 2006, “The Empirics of Social Capital and Economic Development: A Critical Perspective,” FEEM Working Paper 15.06, January 2006, Eni Enrico Mattei Foundation, Milan
  • L Zingales
Zingales, L., 2000, " In Search of New Foundations, " Journal of Finance 55, 1623-1653