Character Cues and Contracting Costs: The Relationship Between Philanthropy and the Cost of Capital

Leon Zolotoy (), Don O’Sullivan () and Jill Klein ()
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Leon Zolotoy: University of Melbourne
Don O’Sullivan: University of Melbourne
Jill Klein: University of Melbourne

Journal of Business Ethics, 2019, vol. 154, issue 2, No 13, 497-515

Abstract: Abstract Prior studies in business ethics highlight the role of philanthropy in shaping stakeholders’ perceptions of a firm’s underlying moral tendencies and values (“character”). Scholars argue that philanthropy-based character inferences influence whether and how stakeholders engage with firms. We extend this line of reasoning to examine the impact of philanthropy on firms’ contracting costs in the capital market. We posit that philanthropy-based character inferences reduce investors’ agency concerns, thereby reducing firms’ cost of capital. We also posit that the strength of the philanthropy–cost of capital relationship is contingent on uncertainty regarding a firm’s character, visibility of a firm, and prevailing philanthropic norms. We test and find support for our arguments in a longitudinal study of philanthropy and the cost of capital. Our findings have implications for business ethics research on corporate philanthropy and corporate social performance and for organizational research on social judgment.

Keywords: Social judgment; Character; Philanthropy; Contracting costs (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (15)

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DOI: 10.1007/s10551-017-3475-9

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