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Review of Quantitative Finance and Accounting

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17-10-2016 | Original Research

Good deeds earn chits? Evidence from philanthropic family controlled firms

Authors: Li-Hsun Wang, Chu-Hsiung Lin, Erin H. Kao, Hung-Gay Fung

Published in: Review of Quantitative Finance and Accounting | Issue 3/2017

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Abstract

This study examines whether charitable family controlled firms have lower default risk. Using Taiwan data that provide clear information about firms’ benevolent intention and avoid endogeneity issue of risk and charitable activities, we show that charitable family controlled firms have lower default risk, which is proxied by value-at-risk and expected shortfall measures. Our finding shows that charitable activities bring benefits of lower risk to shareholders. This study also provides various channels that can lower default risk for the charitable firms. That is, these firms appear to have higher credit ratings, engage less in earnings management, and have higher worker productivity. This study argues that the benevolent mindset of decision makers at firms help lower default risk.

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We explain below how the Taiwanese charitable foundations operate in following section.

According to regulation, foundations need not disclose charitable activities on their financial statements, which are audited by authorities every year.

See Directorate-General of Budget, Accounting, and Statistics, Taiwan (http://www.dgbas.gov.tw).

TEJ ranks the firm credit as A⁺⁺, A⁺, A, A⁻, B, C, and “none.” We assign A⁺⁺ to firms that have a score of 6 and “none” to firms with a score of 0.

We thank the reviewer for suggesting this kind of analysis.

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Title: Good deeds earn chits? Evidence from philanthropic family controlled firms
Authors: Li-Hsun Wang
Chu-Hsiung Lin
Erin H. Kao
Hung-Gay Fung
Publication date: 17-10-2016
Publisher: Springer US
Published in: Review of Quantitative Finance and Accounting / Issue 3/2017
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-016-0607-8

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