Sincerity in Corporate Philanthropy, Stakeholder Perceptions and Firm Value

Ilya R. P. Cuypers, Ping-Sheng Koh, and Heli Wang (2016)

The Article in Brief

This article discuss the relationship between a companys social activities, known as
corporate philanthropy, and its financial performance. In this research, the authors
decide to add more depth by incorporating stakeholders perception into the
companys action. They do that by differentiating the type of corporate philanthropy,
and also by adding the companys characteristics into the equation. From there, they
construct 5 hypotheses based on the interaction of the variables.
The sample for this research is financial data and philanthropic activities from USbased companies within a time span of 19 years. They use residual income model and
incorporate it into each of the hypothesis using relevant variables. The results
presented are all consistent with the hypotheses, therefore it provides validation for
the authors argument.

The Idea
The effect on corporate social responsibility (CSR) program on a firms value has
been studied many times before. The idea is based on a premise that when a company
engage in a social activity, it will eventually provide the company with a financial
benefit. The results of these studies mostly shows that there is benefit in engaging in
philanthropic activities (Wang and Qian, 2011; Wokutch and Spencer 1987).
Still, most studies mainly focus on the existence of the activities, even though some of
them have recognize the role of stakeholders (Berman et al., 2011; Wang et al., 2008),

but they considered the level of acceptance from the stakeholders are generally the
same towards any corporate philanthropic activities.
Based on the theory about symbolic management (Westphal and Zajac, 1994; Zajac
and Westphal,1995), the authors decide to emphasize more on the stakeholders role,
specifically, on their perception (Godfrey, 2005). They argue that when stakeholders
perceive an action to be meaningful, and not just for show, the positive image from
that action will influence the stakeholders to support that company, which in turn, will
provide the company with financial benefit.
The authors differentiate the CSR program based on quantitative and qualitative
aspects, in order to recognize the sincerity of the action. They believe the more the
company donate its money (quantitative aspect), the stakeholders will perceive it as
sincere or substantive. Another aspect is the nature (qualitative aspect) of a CSR
program (McShane and Cunningham, 2012), if a program require the company to
engange directly in the society, the stakeholders will likely be more appreciative
towards the action because they perceive that such action requires more than just
money from the company.
Another aspects that the authors used as an indication of the companys intention are
the type of products that the company made, and the companys position in the
business life-cycle. A company who produce harmful products, such as cigarettes or
alcohol will receive scepticism over their social action, and thus less support compare
to other companies in a different line of business such as food or healthcare. For the
company life-cycle (Dickinson, 2011; Gort and Klepper, 1982), the authors divide it
into 3 stages , Growth, Mature, and Shakeout stage. A company who is at the peak of
its life-cycle (Mature stage) with plenty of resources to spare, their action will be
considered less than that of a company who is at the beginning of its life-cycle

(Growth), or who is starting to decline (Shakeout), because when you have limited
resources, a social activities would require extra commitment, and that gives the
notion of sincerity from your part, otherwise youll be using your resources for the
sake of yourself.
These added features in this study is the main traits that contribute more to the study
of this topic. However, these added features can still be expanded to accommodate
more characteristics that have not been explored.

The Design
The authors structured 5 hypotheses to incorporate all possible scenarios based on the
ideas mentioned above in order to determine the impact of stakeholders perception to
companies doing philanthropic activities. Together with the available data, the authors
use quantitative approach to find answer for their hypotheses. They use regression
model to find the relationship between dependent and independet variables.
Firm Value is used as a dependent variable, whereas the independent variables are
comprise of quantitative and qualitative data. Those quantitave data are the book
value of equity and earnings, while the qualitative data are the type of giving
(Generous or Innovative), firms providing sinful products or services, and firm lifecycle.
Based on the variables and hypotheses, the authors then devised an empirical model
using Ohlson work (1995). To incorporate the qualitative variables into the model, the
authors took several measures to justify the inclusion of these variables. For
quantitative giving, the authors define and limit the minimum amount of money the
company donate on a certain period of time continuously, while for qualitative giving,
any corporate social act, during that period, that was recognized by independent rating

agencies are included in the research. The rating is used for the purpose of filtering for
significance to the stakeholders (Godfrey et al., 2009). All of these qualitative
variables are then assigned dummy variables in order to fit into the equation.

The Results
As each of the hypothesis are differ in term of variables it uses, the authors then adjust
the model using relevant variables to find support or rejection of each of the
hypothesis. As a result of those adjustments, 4 models were created for that purpose.
The results are presented in two tables, the first table provide information about the
correlation for each variables, the second table provide the regression results that
shows the relationships in each model for the relevant hypothesis.
Based on the interpretation of the findings, the results are consistent with the
hypotheses constructed by the authors. The authors also performs other tests to ensure
the reliability of the results, all with similar results.

The Conclusion
This research offer new insight and opportunity for further research on corporate
philanthropy and symbolic management. However, as noted in the article, due to data
availability and the size of the sample, the result of this research still leave plenty of
room for improvement.

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