QUID PRO QUO PHILANTHROPY
Effect of Corporate Philanthropy on Firm Performance: Case of the
Philippines
Bustos, Jon Martin V.
De La Salle University
2401 Taft Avenue, Manila, Philippines
E – mail: jon_bustos@dlsu.edu.ph
Severino, Stephen Karlo L.
De La Salle University
2401 Taft Avenue, Manila, Philippines
E – mail: stephen_severino@dlsu.edu.ph
Durano, Joseph Ace D.
De La Salle University
2401 Taft Avenue, Manila, Philippines
E – mail: joseph_durano@dlsu.edu.ph
Somera, Paolo S.
De La Salle University
2401 Taft Avenue, Manila, Philippines
E – mail: paolo_somera@dlsu.edu.ph
What is the effect of corporate philanthropy on firm performance? A myriad of literature exists on the relationship of corporate social
responsibility (CSR) and firm value. However, these empirical studies remain to be inconclusive, given the fact that scholars use a
multitude of approaches. This paper investigates the relationship between corporate social responsibility and firm performance, in the
context of one of the dimensions of CSR – corporate philanthropy. To our knowledge, ours is the first study to investigate the
relationship between corporate philanthropy and firm performance in the Philippine setting. Integrating various theories and concepts
from past literature, we come up with three hypotheses for this study: First, we argue that there exists a curvilinear relationship
between corporate philanthropy and firm performance. Second, given the same level of corporate philanthropy, the more dynamic the
industry to which a firm belongs to, the greater is the effect of corporate philanthropy on firm performance. Lastly, consumer
awareness, as represented by advertising intensity, can either enhance or dampen the effect of corporate philanthropy on firm
performance. Through a panel data regression of 144 firms publicly – listed in the Philippine Stock Exchange (PSE) from 2008 to
2012, we find that there exists an inverse U – shaped relationship between corporate philanthropy and firm performance, that is
corporate philanthropy positively affects firm performance on the outset; however, at a certain point, further increases in the level of
corporate philanthropy will decrease firm performance. We also find that consumer awareness, as represented by advertising intensity,
dampens the relationship between corporate giving and firm performance, as increases in advertising intensity lowers the impact of
corporate philanthropy on firm performance. Lastly, we find no evidence that dynamism enhances the relationship between corporate
philanthropy and firm performance.
1.
INTRODUCTION
In the Philippines, corporate philanthropy is deeply –
rooted in the traditions of its people, and has long been present
since decades ago (Velasco, 1996). In spite of this, current
legislators still observe that business organizations remain to be
more concerned with its profit maximizing objectives, rather
than societal welfare (S. 1239, 2011). Consequently, Senate Bill
1239, or the Corporate Social Responsibility Act of 2011 was
proposed at the Philippine Senate. The proposed act calls for
institutionalizing corporate social responsibility in the country,
by encouraging business organizations, specifically corporations,
to “take responsibility for the impact of their activities on
customers, employees, shareholders communities, and
environment” (p. 1), in exchange for full deductions of the
expenditures incurred in the exercise of corporate social
responsibility (S. 1239, 2011).
The provisions in this bill are not the first of its kind, as
similar laws have been implemented in other countries (e.g., 2%
mandate for Corporate Social Responsibility initiatives in India
(Chhabra, 2014), Charitable Contributions Deductions of the
Internal Revenue Service (2014) of the United States of
America, the European Union (EU) (2001) Green Paper).
Without question, these mandates are beneficial to society at
large. However, it begs the question, are there any benefits to the
firm? Should Philippine corporations embrace the proposed
Corporate Social Responsibility Act?
In the United States, according to the National
Philanthropic Trust (2014), corporate giving for the year 2013
summed to $16.76 billion. Historically, firms already have a
concept of corporate social responsibility as early as the late
nineteenth century. For the past decade, American corporations
focus on integrating corporate social responsibility initiatives to
their core competencies (UNESCAP, 2013). Matten and Moon
(2008) provide an extensive description of CSR initiatives in the
United States. American firms are said to undertake explicit
CSR, which are defined in the study as activities that attempt to
address societal issues in a voluntary and deliberate manner.
CSR initiatives are a response to stakeholder pressure, and firms
use it as a means of explaining their practices to their
stakeholders; hence the term ‘explicit’ CSR (Matten and Moon,
2008). With regards to the legal aspect of corporate
philanthropy, the Internal Revenue Service deducts charitable
contribution expenses made by a corporation under certain
conditions1 (IRS, 2014).
In contrast to the explicit CSR perspective in the United
States, Matten and Moon (2008) describe corporate social
1
For a comprehensive discussion of the different qualified
organizations, deductible amounts, timing of contributions, and
limits of amounts, see http://www.irs.gov/Charities-&-NonProfits/Charitable-Organizations/Charitable-ContributionDeductions
2 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
responsibility in Europe as implicit. As opposed to being
voluntary, CSR initiatives in Europe are part of “codified norms,
rules, and laws” (Matten and Moon, 2013, p. 410). Recently,
however, there have been attempts by the European Union to
formalize CSR initiatives. The Green Paper of the EU
encourages European corporations to go beyond what is
expected of firms when it comes to corporate social
responsibility activities. By surpassing the regulatory
requirements, the EU envisions a “competitive and dynamic
knowledge-based economy in the world, capable of sustainable
economic growth with more and better jobs and greater social
cohesion” (EU, 2001, p. 4).
From these perspectives, it is seen that corporate social
responsibility goes beyond the legal aspects in the case of the
United States and Europe. According to Danko et al. (2008), the
trend for corporate social responsibility is all about integrating
CSR activities into business operations. Taking this into
consideration, should Philippine firms follow suit?
For other firms, it can be the case that corporate social
responsibility comes naturally, given that philanthropy is a well
– established tradition; therefore, incentives such as the one
presented in the Corporate Social Responsibility Act are not
necessary. On the other hand, there might be firms that simply
view philanthropic activities to be costs to the company;
therefore tax cuts are good motivations to engage in corporate
social responsibility. According to Lev et al. (2008), the former
argument can be verifiable, as shareholders or the managers of
the firm can simply be altruistic in nature, expecting no reward
for their philanthropic actions. However, at the same time, for
corporate philanthropy to be effective, altruism must be the
motivation for all managers. Unfortunately, this is not the case,
as very little empirical research shows such situation (Lev et al.
2008). For the latter argument, Knauer (1994) posits that
managers do not see tax deductions to be good motivators for
corporate giving. In a survey 2, tax deductions do not act as
incentives for most managers to engage in corporate giving
activities (Knauer, 1994).
Instead of viewing it in the aforementioned
perspectives, firms that are inherently profit – oriented can in
fact associate CSR initiatives with bottom – line benefits. Other
corporate social responsibility literature also explicitly supports
the notion that corporate giving can be viewed as a profit –
maximizing objective (Knauer, 1994; Lev et al., 2008;
Tsoutsoura, 2004). Given that corporate philanthropy, in
essence, is a cost to the corporation, for it to be sustainable it
must also give the firm some form of benefit (Tsoutsoura, 2004).
Otherwise, if the objective of a firm is to maximize profit, then
2
In a survey presented in the study Paradox of Giving: Tax
Expenditures, the Nature of the Corporation, and the Social
Construction of Reality by Nancy Knauer (1994), only 26% of
CEOs see tax laws as ‘substantial’ incentives to corporate giving
activities, while 48% agreed that it provides ‘some’, ‘very
slight’, or ‘no’ incentives at all (Knauer, 1994).
engaging in corporate philanthropy is a waste of funds (Knauer,
1994). Therefore, there is a need for corporate philanthropy to
provide bottom – line benefits (Tsoutsoura, 2004).
Extensive literature discusses the possibility of a
corporate social performance (CSP) and corporate financial
performance (CFP) relationship. Margolis and Walsh (2003)
provide a summary of empirical studies that explore the
relationship. Table 1 shows the number of studies they found to
have a positive, negative, non – significant, and mixed
relationship. It is evident that previous literature remains
inconclusive. In another summary of literature, Griffin and
Mahon (1997) evaluate CSP – CFP studies found in the
chemical industry. Similarly, the study finds varying results. The
reason behind it is the noticeable differences in methodology,
and the possibility of misspecifications in the model (Griffin and
Mahon, 1997; Margolis and Walsh, 2003; Servaes and Tamayo,
2013). This can be the case, as in the summary; scholars use
different measures for corporate social performance (e.g.,
Kinder, Lydenberg, Domini & Co (KLD) evaluation, Fortune
reputation ratings, mutual funds screens, disclosure of social
performance) and for corporate financial performance (e.g.,
accounting – based and market – based). Alternatively, Brammer
and Millington (2008) suggest that an alternative explanation for
the differences is the nonlinearity of the relationship between
CSP and CFP.
Table 1. CSP - CFP literature as summarized by Margolis and
Walsh (2003).
Conclusions
Number of Studies
Positive
54
Negative
7
Non – significant
28
Mixed
20
Given the ambiguous results and the multitude of
approaches one can use towards the study of the relationship
between corporate social responsibility and financial
performance, it would be interesting to look into the case of the
Philippines. Home to over 30,000 nongovernmental
organizations, the Philippines has a very dynamic non – profit
sector, with philanthropy a part of the Filipino culture (Rimando,
2012; Velasco, 1996). In a survey conducted by the League of
Corporate Foundation, it is found that chief executive officers
(CEOs) engage their firms with CSR initiatives 77% of the time.
Meanwhile, the board of directors introduces CSR to the
company 83% of the time (Rimando, 2012). Currently, the
country is home to four organizations dedicated to the
proliferation of corporate social responsibility. These are the
Bishops – Businessmen’s Conference (BBC), Association of
Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
3 Foundations (AF), League of Corporate Foundations and the
Philippine Business for Social Progress (PBSP). Among the
four, PBSP is the most internationally renowned, as it is part of
the Asia – Pacific Philanthropy Consortium (APPC) (Velasco,
1996).
In spite of the number of business organizations geared
towards philanthropy, there have been no studies on the
relationship between corporate social responsibility and firm
performance in the Philippines. Unlike the United States and
certain countries in Europe, there is no index to measure the
level of corporate social performance in the country, therefore,
hindering any empirical research. This can be attributed to the
fact that philanthropic activities, such as volunteerism and social
ventures remain undocumented and informal in the country
(Velasco, 1996). Relating this to the explicit and implicit CSR
mentioned in the previous discussion, Philippine CSR initiatives
seem to be in between the two; there are some firms that disclose
charitable giving but are sporadic with it.
It should be noted, however, that indices are not the
only measures of corporate social performance. One that is
commonly used in studies is corporate philanthropy, as
represented by charitable contributions expense (Brammer and
Millington, 2008; Godfrey, 2005; Lev et al., 2008; Tsoutsoura,
2004; Wang et al., 2008). Scholars adduce a number of reasons
as to why charitable contributions expense best captures
corporate social performance. For one, it is easily measurable
due to the rich data set on charitable contributions (Lev et al.,
2008). Philanthropic activity is also viewed as one of the more
important facets of corporate social responsibility (Godfrey,
2005). Corporate philanthropic activities are also considered to
reveal more of the corporate strategy with respect to social
responsiveness, as corporate contributions are often under the
discretion of the managers (Brammer and Millington, 2008).
Like CSP – CFP studies, empirical research on the
relationship of corporate philanthropy and firm performance is
also ambiguous. There exist studies that find a positive effect,
while there are studies that find no relationship at all. For Lev et
al. (2008), charitable contributions positively affect firm
performance in the form of sales growth. Tsoutsoura (2004) also
finds a positive relationship between corporate philanthropy and
firm performance. For Pecorino (2012), donating a portion of the
profits of a firm to charity has a positive effect on firm
performance. On the other hand, Fauzi et al. (2007) find no
relationship between corporate giving and firm performance. In
another study by Fauzi (2009), there is also no evidence that
supports a relationship between CSP and CFP.
Other than the inconclusive results, the giving –
performance literature also reveals a much more sophisticated
relationship between social performance and firm performance.
One of the interesting hypotheses is the shape of the relationship.
In the study of Brammer and Millington (2008), there exists a U
– shaped relationship between corporate philanthropy and firm
performance. The empirical research points out that a firm is
better off engaging in intense corporate philanthropy or no
philanthropy at all, than having a moderate level of corporate
giving. In contrast, Wang et al. (2008) finds an inverse U –
shaped relationship. The study finds that financial performance
would keep on increasing as the firm increases its level of
corporate giving. However, due to the presence of agency costs,
resulting from managerial discretion and the limitations of
stakeholders, it reaches a point wherein it would decrease firm
performance (Wang et al., 2008). Thus, it is of interest to
consider the possibility of a nonlinear relationship between
corporate philanthropy and firm performance.
Other than the shape of the corporate giving and firm
performance relationship, Wang et al. (2008) also delves into the
role of environmental dynamism in the industry a firm belongs
to. Literature suggests that the industry environment can affect
the CSP – CFP relation (Brammer and Millington, 2008;
Knauer, 1994; Godfrey, 2005; Lev et al., 2008; Servaes and
Tamayo, 2013; Wang et al., 2008). In fact, Vaidyanathan (2008)
strongly advocates that industry – effects should be considered
in the study of the giving – performance relationship. For Wang
et al. (2008), environmental dynamism enhances the effect of
corporate philanthropy on firm performance; that is, the more
dynamic the environment a firm belongs to, the greater is the
effect of corporate philanthropy on firm performance. Given the
distinct influence of environmental dynamism, it would be
compelling to look into its role in the corporate philanthropy and
firm performance relationship.
Another noteworthy hypothesis is the role of consumer
awareness. Advertising intensity has been used in most empirical
research as a control variable (Brammer and Millington, 2008;
Lev et al., 2008; Wang et al., 2008). However, there are scholars
that recognize the bigger role of advertising intensity in the CSP
– CFP relationship. Servaes and Tamayo (2013) hypothesize that
corporate social responsibility can only be effective if it is
coupled with high consumer awareness, as represented by
advertising intensity. The study suggests that for CSR efforts to
be successful, companies must heighten its CSR awareness
among its stakeholders (Servaes and Tamayo, 2013).
Alternatively, studies also suggest that advertising can adversely
affect the impact of corporate social responsibility on firm
performance. Godfrey (2005) argues that advertising corporate
giving can possibly have a negative effect on firm performance.
Pomering and Johnson (2009) reinforce this notion by
suggesting that skepticism, which can detrimental to the firm,
may in fact arise when a firm advertises it corporate social
responsibility initiatives. Taking these arguments into
consideration, the substantial role of advertising intensity in the
corporate giving and firm performance relationship must also be
looked into.
The previous discussions reveal that the corporate
philanthropy and firm performance relationship is far from being
straightforward. Studies such as those of Wang et al. (2008) and
4 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
Servaes and Tamayo (2013) provide an interesting angle with
regards to the CSP – CFP relationship. Given this, it would be of
interest to shed light on this relationship in the Philippines, while
considering how certain conditions such as environmental
dynamism and consumer awareness moderate the relationship.
In this paper, we attempt to investigate the effect of
corporate philanthropy on firm performance in the Philippine
setting. Thus, the research question of the paper is “What is the
relationship between corporate philanthropy and firm
performance?” Furthermore, we attempt to investigate three core
assertions: (1) whether there is a curvilinear relationship between
corporate philanthropy and firm performance, (2) whether
industry dynamism affects the relationship between corporate
philanthropy and firm performance, and; (3) whether consumer
awareness, as represented by advertising intensity, affects the
relationship between corporate philanthropy and firm
performance.
To our knowledge, ours is the first study that explores
the relationship between corporate social performance and
corporate financial performance in the Philippines. The
philanthropic landscape in the Philippines is distinct from
western countries. Unlike in the United States, where
philanthropy is funneled through institutions, individual
philanthropy continues to be more prevalent in society.
According to De Guzman (2013), the biggest philanthropists in
the country are also the richest businessmen who own the largest
corporations. These philanthropists are said to donate their
personal money, rather than the wealth of the shareholders of
their respective firms (De Guzman, 2013). Furthermore, the
timing of contributions also differ in the country, as Velasco
(1996) points out that most philanthropic activities are only done
at specific times of the year, such as when a calamity hits, or
during elections. This sporadic corporate philanthropy is
contrary to other countries. In addition, similar to Servaes and
Tamayo (2013), our research aims to confirm the perspective
that corporate social responsibility activities only affect firm
performance by taking into consideration other moderating
variables in the relationship, which in our case are environmental
dynamism and consumer awareness. Thus, the significance of
the study rests on, first, its novelty as the first empirical study to
look into the relationship of corporate philanthropy and firm
performance, and second, the addition of a new perspective on
the relationship in the existing CSP – CFP literature.
In this paper, we examine publicly listed firms using
data from 2008 – 2012 for which we have available data for all
variables. The elimination process, which is discussed in Section
3, also limits the empirical research. Despite the fact that this is
the first study of its kind to investigate the relationship in the
Asian region, the results, conclusions, and policy
recommendations to be made in the study might not be
applicable to other countries.
The rest of the paper proceeds as follows. Section 2
integrates compelling literature and establishes a strong
theoretical and conceptual foundation in order to rationalize the
three main arguments of the paper. Section 3 discusses the
methodology and econometric modeling of the study. In this
section, we attempt to provide a well – established empirical
framework by discussing the data collection procedure, our
regression model, the variables, and the estimation procedures.
Our findings, including the descriptive statistics and empirical
results, are presented and extensively discussed in Section 4.
Finally, we conclude our paper in Section 5, suggest
recommendations, and suggest directions for future research on
the CSP – CFP relationship in Section 6.
2.
THEORIES, CONCEPTS, AND HYPOTHESES
Corporate Social Responsibility and Corporate Philanthropy
According to Servaes and Tamayo (2013), before
investigating the relationship between corporate social
performance and corporate financial performance, it is important
to first discuss the dimensions of CSR. In this part, we link
corporate social responsibility to corporate philanthropy.
The definition of corporate social responsibility has
evolved throughout time. From a vague definition of simply
being a social responsibility of businessmen, it has developed to
its present interpretation, which includes a multitude of
dimensions such as social, ethical, environmental, economic and
legal (UNESCAP, 2013). The infamous article of Milton
Friedman in The New York Times Magazine provides a more
controversial definition of CSR. Friedman (1970) states, “the
social responsibility of firms is to increase profits” (p. 1). Given
the abundant interpretations, we follow the definition of Servaes
and Tamayo (2013) by recognizing the concise yet
comprehensive description of the World Business Council for
Sustainable Development (WBCSD). The organization defines
CSR to be “the continuing commitment by business to behave
ethically and contribute to economic development while
improving the quality of life of the workforce and their families
as well as of the local community and society at large” (World
Business Council for Sustainable Development, 2000, p. 8).
Given that corporate social responsibility is
multidimensional, Hillman and Keim (2001) submit the need to
decompose the definition into its many facets. Brammer and
Millington (2008) strengthen the need to evaluate the individual
aspects of CSR, as these are differently motivated in nature.
Among the different aspects, corporate giving is regarded to be
one of the elements of the more extensive movement that is
corporate social responsibility (Vaidyanathan, 2008). Formally,
the Financial Accounting Standards Board (FASB) defines it to
be the “unconditional transfer of cash to an entity, or a
settlement of its liabilities in a voluntary nonreciprocal transfer
by another entity acting other than as an owner” (Financial
Accounting Standards Board, 1993, p. 2; Godfrey, 2005, p. 778).
Previous literature delves into why corporate giving is
the superlative representation of corporate social responsibility.
According to Brammer and Millington (2008), unlike other
dimensions of CSR, corporate philanthropy can solve a wide
Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
5 variety of issues. Lev et al. (2008) strengthen the choice of
corporate philanthropy by expressing that unlike other CSR
activities, managers have more control over corporate giving as
they have the liberty to vary the amount. From the perspective of
empirical research, this gives corporate giving the desired trait of
variability (Lev et al., 2008). Given that it is the managers who
decide how much a firm gives, corporate giving then also gives
us an understanding of the business strategies of the firm 3
(Brammer and Millington, 2008). Moreover, corporate
philanthropy is an integral part of firm performance (Brammer
and Millington, 2008; Godfrey, 2005). Godfrey (2005) also
affirms that the debate on the relationship between corporate
philanthropy and firm performance is only one dimension of a
bigger discourse about the relationship of corporate social
performance and corporate financial performance, which is the
objective of this study.
positive sign in the CSP – CFP relationship. Orlitzky et al.
(2003), however, find no rationale in making hasty
generalizations on the mere basis of counting how many studies
that found a positive relationship. Concluding that CSP
positively affects CFP, on this ground, looks past the differences
in theoretical foundations, which are vital in analyzing the
relationship. Van der Laan et al. (2007) are also not convinced
that the positive sign suggested by the dominant positive
relationship empirical studies should be fully embraced, since a
sufficient theoretical link has yet to be established by previous
studies. Therefore, in the study of the CSP – CFP relation and
subsequently one of its facets, which is the corporate
philanthropy and firm performance relation, it is imperative to
investigate on the theoretical and conceptual developments of
the relationship (Godfrey, 2005; Orlitzky et al., 2003; Van der
Laan et al., 2007).
Effect of Corporate Giving on Firm Performance
Literature provides several pathways on how corporate
philanthropy can affect firm performance. For the purpose of this
study, we group the empirical studies according to theoretical
foundations and briefly discuss each one.
Existing literature remains inconclusive about the
relationship of corporate philanthropy and firm performance
(Margolis and Walsh, 2003; Orlitzky et al., 2003; Wood and
Jones, 1995). In an empirical review by Wood and Jones (1995),
there exists no relationship between corporate social
performance and financial performance, due to the lack of any
theoretical foundation that clearly links CSP to CFP. Almost a
decade later, Margolis and Walsh (2003) review 109 empirical
studies on corporate philanthropy and firm performance in an
attempt to assess the CSR – CFP relationship. Results are
inconclusive, as different studies point out positive relationships,
negative relationships, and even mixed relationships. A similar
result is found in the meta – analysis review of Orlitzky et al.
(2003). In their review of 52 empirical studies on the CSP – CFP
relationship, the effect of corporate philanthropy on firm
performance is also said to be ambiguous.
These empirical reviews are unanimous in arguing that
the differences in the results are primarily due to the different
methodologies employed (Griffin and Mahon, 2007; Margolis
and Walsh, 2003; Orlitzky, 2003; Wood and Jones, 1995). In
addition, the lack of a clear measure for corporate social
performance and corporate financial performance contributes to
the inconclusiveness of the studies (Wood and Jones, 1995;
Vaidyanathan, 2008). The possibility of misspecification in the
model can also cause the variation in conclusions (Margolis and
Walsh, 2003; Servaes and Tamayo, 2013).
Despite the inconclusive results, these summaries still
find more studies that show a positive relationship between
corporate social performance and corporate financial
performance (Margolis and Walsh, 2003; Orlitzky et al., 2003).
Given that there are more empirical research that suggest a
positive relationship, one can easily be prompt to accept the
3
See Brammer and Millington (2004), Siegfried, McElroy, and
Biernot – Fawkes (1983) for a more comprehensive explanation
on how corporate giving can reveal the business strategies of a
corporation.
Resource Dependence Theory and Stakeholder Theory. There
are empirical studies that use theories (e.g., resource dependence
theory, stakeholder theory, agency theory) to explain the link.
Firms are argued to be dependent on its stakeholders for the
resources critical to their operations. These stakeholders demand
certain provisions before giving these resources (Berman et al.,
2006). Corporate philanthropy is argued to be able to fulfill these
demands; thus enabling firms to acquire the necessary resources,
thereby increasing firm performance (Brammer and Millington,
2008; Wang et al., 2008).
Consumer Awareness and Signals of Product Quality. On the
other hand, several empirical researches also view the
importance of consumers in the relation (Lev et al., 2008;
Pecorino, 2012; Servaes and Tamayo, 2013). According to Lev
et al. (2008), and corporate philanthropy is able to increase the
revenue of the firm through the mechanism of customer
satisfaction. In a similar view, Pecorino (2012) also posits that
the positive effect of corporate philanthropy on firm
performance depends on the perspective of the consumers. For
example, donating a percentage of its profits to the public could
increase a firm’s profits (Pecorino, 2012). Similarly, Servaes and
Tamayo (2013) argue that for corporate social responsibility to
have an effect on firm performance, consumers must first be
aware of its CSR activities. On a similar note, corporate social
activities can act as signals of product quality. As a firm engages
in CSR activities, which are essentially costs for the firm, this
gives the impression among consumers that the firm is not
entirely profit – motivated, thus making their product seem of
higher quality (Fisman et al., 2006).
CSR and Advertising. Corporate philanthropy is also able to
fulfill the role of advertising through cause – related marketing
as stakeholders are more willing to pay a premium for firms that
engage in CSR initiatives (Brammer and Millington, 2008l Lev
et al., 2008; Knauer, 1994). According to Lev et al. (2008),
Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
6 charitable contributions can enhance brand identification, akin to
the functions of advertising. Knauer (1994) extensively
discusses cause – related marketing, wherein corporate giving
does the function of advertising.
Corporate Philanthropy as ‘Insurance – Like’ Protection. The
comprehensive framework that corporate philanthropy can act as
insurance – like protection for intangible assets is also viewed to
be very compelling (Godfrey, 2005; Tsoutsoura, 2004;
Vaidyanathan, 2008). According to Godfrey (2005), corporate
philanthropy can create positive moral capital, thus bringing
forth ‘insurance – like’ protection to the relationship – based
assets of the firm.
It is evident that scholars provide various explanations
of how corporate philanthropy can affect firm performance.
Given the great importance levied on laying a strong theoretical
and conceptual framework, our study also attempts to establish
our own pathway that links corporate philanthropy to firm
performance.
equity), what is imperative now is how society perceives the
firm (Tokoro, 2007).
These conclusions reinforce the salience of stakeholders
in our attempt to study the relationship between corporate
philanthropy and firm performance. Before proceeding, it is
important to define what a stakeholder is. Freeman (1984)
defines a stakeholder to be “any group or individual that
affect[s], or is affected by, the achievement of a company’s
aims” (Freeman, 1984; Freeman and McVea, 2001 p. 4).
Clarkson (1995) defines a stakeholder as anyone ‘who bear[s]
some form of risk as a result of having invested some form of
capital – human or financial’ (Clarkson, 1995; Hillman and
Keim, 2001, p. 126). Stakeholders are also any individuals or
groups that uphold a universal moral preference (Godfrey,
2005). The definition of stakeholder is further divided into two –
the primary stakeholder, or those who can directly have an
exchange with firms (e.g., shareholders, investors, employees,
customers, suppliers), and secondary stakeholders, or those who
do not share an interdependent relationship with a firm (Hillman
and Keim, 2001; Van der Laan et al., 2007).
Linking Corporate Philanthropy to Firm Performance
In this study, we argue that by integrating the
stakeholder management theory, resource dependence theory,
and the ‘insurance – like’ properties of CSR activities, corporate
philanthropy can positively affect firm performance by
improving firm reputation.
Upon assessing the different studies on the relationship
between corporate philanthropy and firm performance, it is
evident that the stakeholder is the common denominator across
all literature. Several studies emphasize on the crucial role of
stakeholders in studying corporate social performance and
corporate financial performance relationship (Hillman and Keim,
2001; Tokoro, 2007; Van der Laan et al., 2007; Wood and Jones,
1995). According to Wang et al. (2008), the interaction between
the firm and its stakeholders is an important frame of reference
when studying the relationship between corporate philanthropy
and firm performance. To strengthen this argument, Servaes and
Tamayo (2013) point out that consumers, one of the stakeholders
of the firm, can influence firm performance through their
purchasing behavior. As an example, Hillman and Keim (2001)
state that it is the objective of a consumer to purchase products
that are reasonably cheap, but without sacrificing quality. If the
firm does not meet this goal, the consumer buys fewer units of
this product. The decrease in sales, affects the profitability of the
firm, thereby also affecting firm performance. Thus, the
consumer, although strictly not the only stakeholder of a firm, is
evidently an important reference in the study of the relationship
between corporate philanthropy and firm performance (Servaes
and Tamayo, 2013). With regards to profit maximization,
Berman et al. (1999) see profit maximization to be closely tied to
effective stakeholder management. Moreover, according to
Tokoro (2007), the sine qua non for the survival of a firm has
changed in the 21st century. From traditional measures of
financial performance (e.g., sales, market shares, return on
Clarkson (1995) argues that the survival of a firm
hinges on its capacity to satisfy its ‘economic and social
purpose’, which is to generate enough value to keep its primary
stakeholders in its system (Clarkson, 1995; Hillman and Keim,
2001). Instrumental stakeholder theory revolves around the same
postulation. As discussed by Brammer and Millington (2008),
stakeholders hold essential resources that can increase financial
performance. Profit maximization is also closely tied to effective
stakeholder management (Berman et al., 1999). With these
submissions, it is apparent that the resources held by
stakeholders have an effect on firm performance. The resources
referred to are those that are relationship – based or the resources
that are dependent on the relationship of the firm with its
stakeholders (Godfrey, 2005; Wood and Jones, 1995). Clarkson
(1995) collectively define these to be relational wealth
(Clarkson, 1995; Godfrey, 2005; Hillman and Keim, 2001).
These resources are not necessarily tangible, as most relationship
– based resources are in fact intangible in nature (Godfrey,
2005). These resources might be the competitive edge of the
firm, or any capital that increases the ability of firms to
‘outperform its competitors’ (Godfrey, 2005; Hillman and Keim,
2001). This argument is also central in the resource dependence
theory, which argues that organizations are dependent on the
entities in its environment when it comes to the resources that
are essential to their operations (Johnson, 1995). These resources
are vital to the survival of the firm, thereby affecting firm
performance. According to Pfeffer and Salancik (1978), this is
due to the concept of interdependence. Organizations must
interact with elements in the environment in order to acquire the
vital resources. These resources are essential to the operations of
the firm, and ultimately to their survival.
These assertions suggest the vital importance the
stakeholders of the firm have. This role is further magnified
when stakeholders demand certain actions before supplying
crucial resources. Given that stakeholders can do so, the
Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
organization faces external constraints and uncertainty (Pfeffer
and Salancik, 1978; Johnson, 1995). Berman et al. (2006) also
argue that uncertainty from stakeholders is possible, as they can
easily employ strategies that would incapacitate the organization
from obtaining resources. Thus, there is a need for managers,
much like the organizational leaders, to give the stakeholders
attention (Berman et al., 2006). These statements claim that
firms must seek a mechanism for which they can fulfill the
demands of stakeholders, in order to access their resources,
which contribute to firm performance.
One mechanism is corporate philanthropy, and the
subsequent enhancement of firm reputation. Literature cites the
role of reputation as one of the more crucial instruments by
which corporate philanthropy can affect firm performance
(Vaidyanathan, 2008). According to Wang et al. (2008), firms
can attempt to secure resources that are essential to its operations
through corporate philanthropy. How does reputation play a role
in the corporate social performance and corporate financial
performance relation? Godfrey (2005) provides a comprehensive
theoretical framework on how corporate philanthropy can
positively affect the reputation of the firm, which stakeholders
consider when providing the resources necessary for firm
performance. In Figure 1, corporate philanthropy creates positive
moral capital among its stakeholders. This moral capital brings
forth an “insurance – like” protection of the critical relationship
– based resources 4 , which then leads to an increase in
shareholder wealth. Wood and Jones (1995) argue that
stakeholders evaluate organizations. Collectively, these
assessments produce corporate reputation, which is defined to
be the “perceptual representation of a company’s past actions
and future prospects that describes the firm’s overall appeal to
all of its key constituents when compared with other leading
rivals” (Fombrun, 1996, p. 72; Strongman, 2013, p. 1).
Figure 1. Theoretical framework of how corporate philanthropy
can contribute to firm performance as presented by Godfrey
(2005)
Corporate Philanthropy Moral Capital Insurance Like Protection Share-­‐
holder Wealth From this definition, it can be deduced that evaluations
can be positive or negative. Similar to this, Godfrey (2005) also
asserts that stakeholders assign values to every organizational
action. One of the activities of an organization is corporate
philanthropy. The assessment of stakeholders of corporate
philanthropy constitutes the philanthropic moral reputational
capital (Godfrey, 2005). Moral capital can be in fact, positive or
4
7 The resources Godfrey (2005) considers in his study are the relational
wealth defined in the previous discussions. In his research, Godfrey
comprehensively explains why these resources cannot be ensured by the
conventional insurance, as relational wealth does not meet the criteria of
a functioning insurance market. Therefore, there is a need to ensure
these resources through mechanisms, one of which is corporate
philanthropy.
negative. Similarly, corporate philanthropy can generate positive
or negative moral capital, depending on whether the activity is in
fact authentic or just ingratiating (Godfrey, 2005). For the
purpose of this study, we focus on how corporate philanthropy
creates positive moral capital.
According to Godfrey (2005), positive moral capital
can provide insurance – like protection by reducing the negative
evaluations of stakeholders. In an example by Godfrey (2005),
Unocal is a natural gas pipeline corporation in Burma. Locally,
the firm is condemned for its unethical business practices (e.g.,
repression of the locals, political involvement, destruction of the
environment). In response to these allegations, the firm insists
that they engage in corporate philanthropy, such as educational
and community development activities. Despite the bad
publicity, including the repression of the locals, Unocal is still
regarded to be one of the best corporations to work for by
employees (Godfrey 2005). This example reveals how corporate
philanthropy acts on behalf of the firm. An explanation of why
Unocal remains to be a top firm is that its negative activities that
harm the reputation of the firm are tempered and discounted by
their being socially responsible (Godfrey, 2005; Tsoutsoura,
2004).
Firms that engage in strategic corporate philanthropy
view CSR initiatives as compensations for or as an instrument to
disguise their unethical and ‘questionable’ actions (Knauer,
1994). This is often called the halo effect (Steckel and Simons,
1992; Knauer, 1994). According to Knauer (1994), when firms
engage in corporate social activities, the public perceives these
actions positively; therefore creating an atmosphere that is
favorable to the firm. By the simple act of investing in corporate
philanthropy, stakeholders attach a halo to the firm for their
actions. In the case of Unocal, in spite of the negative publicity,
the firm is able to secure its resources necessary for firm
performance (in this case, employees) by engaging in corporate
philanthropy. In evaluating the firm, stakeholders are able to
discount the negative effects of the unethical behavior of the
firm due to their CSR activities. Firms can engage in CSR
activities beforehand so that in the case a socially negatively –
perceived event happens, corporate philanthropy is, therefore,
able to act like an “insurance – like” protection on the resources.
From this perspective, corporate philanthropy seems to
be a ‘win – win – win ’ situation (Steckel and Simons, 1992;
Knauer, 1994). By virtue of the halo effect, corporate
philanthropy becomes an effective tool that satisfies both the
firm and its stakeholders. It enables the firm to have access to
both its resources, which consequently becomes profit, and at the
same time establishes good reputation from its peers. On the
other hand, stakeholders benefit as well as they feel virtuous in
associating themselves to socially responsible firms (Knauer,
1994).
This theoretical framework presents our pathway that
links corporate philanthropy to firm performance. It should be
noted that the association between corporate philanthropy and
firm performance presented so far suggests a positive linear
Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
8 relationship. However, as postulated by some scholars, this may
not always be the case. The relationship can in fact, enter a non –
linear shape (Brammer and Millington, 2008; Wang et al., 2008).
Furthermore, the framework presented by Godfrey (2005) makes
one crucial assumption that agency problems do not exist, that is
managers are not motivated by personal interests. However, it is
apparent that this is not the case. According to Vaidyanathan
(2008), there are cases wherein managers base their decisions on
personal preferences, rather than taking into account the
stakeholders when it comes to corporate philanthropy. In another
view, the existence of strategic philanthropy and the optimal
level of philanthropy suggest that at some level, corporate
philanthropy should begin to negatively affect firm performance
(Godfrey, 2005; Knauer, 1994; Servaes and Tamayo, 2013). In
this study, we submit that the corporate philanthropy – firm
performance relation is in fact best represented by an inverse U –
shaped relationship due to the possible presence of agency costs
arising from managerial discretion, and the existence of such
optimal level of corporate philanthropy.
Curvilinear Relationship between Corporate Philanthropy
and Firm Performance
Literature, as reinforced by theories such as the
neoclassical stakeholder theory and resource dependence theory,
unanimously agree that corporate philanthropy positively affects
firm performance. However, this view is not immune to
shortcomings, as the possibility of agency costs and the fact that
corporate philanthropy cannot indefinitely sustain a positive
effect on firm performance are not out of the question. Brammer
and Millington (2008) provide a thorough theoretical
background on the different shapes the CSP – CFP relationship
can take. One of their postulations is a curvilinear relationship.
According to the study, although corporate social responsibility
can bring positive effects to the financial performance of a firm,
this relationship is still ‘subject to diminishing, and eventually
decreasing returns’ (Brammer and Millington, 2008, p. 1239).
Wang et al. (2008) also argue that at some level, the positive
effect of corporate philanthropy on firm performance should
eventually reach a maximum point and then decline. What can
cause the effect of corporate philanthropy to financial
performance to diminish?
Studies point to agency costs arising from the problems
of both the managers and the stakeholders as one possible reason
(Brammer and Millington, 2008; Lev et al., 2008; Wang et al.,
2008; Vaidyanathan, 2008). In corporate jargon, shareholders act
as the principals, while managers act as the agents (Brammer
and Millington, 2008). Managers play a very salient role in the
stakeholder and resource dependence perspective. According to
Berman et al. (2006), the role of a manager is significant as they
can dictate the direction of the firm or its relationship with its
stakeholders. Their decisions with regards to the firm
consequently affect financial performance (Berman et al., 2006).
One of the decisions managers have to make is
corporate philanthropy. In fact, decisions on corporate social
responsibility activities are almost entirely levied on the ruling
of the manager alone (Choi and Wang, 2007; Velasco, 1996).
According to Choi and Wang (2007), the relationship between
corporate giving and financial performance is entirely dependent
on the level of benevolence and integrity values of managers. In
relation to the resource dependence theory, it is the managers
who develop relationships with the stakeholders. These
decisions then affect corporate financial performance (Choi and
Wang, 2007). This seems to describe the case of the Philippines.
CEOs in the country have a high influence in conducting
corporate philanthropy. In a survey conducted, almost 50% of
CEOs in the country agreed that CSR initiatives are under the
discretion of the CEOs (Velasco, 1996).
Although it is expected for the principals and managers
to have streamlined objectives for the firm, in reality, this is
rarely the situation. Viewing agency costs in the context of
corporate philanthropy, managers may exploit corporate
resources and use them for their personal interests, which are
nowhere near the objectives of the firm. (Brammer and
Millington, 2008). According to Vaidyanathan (2008), there are
cases wherein managers base their decisions on personal
preferences rather than taking into account the stakeholders and
the goals of the firm, when it comes to strategic philanthropy
(Vaidyanathan, 2008). Moreover, Friedman (1970) argues that
managers are suspect to use corporate philanthropy for their
personal agenda and career advancements where the firm and its
stakeholders shoulder these costs (Wang et al., 2008). Werbel
and Carter (2002) carefully study the behavior of CEOs with
their charitable giving. The study argues that CEOs can give
charitable contributions without any regard to both social needs
and the interests of the firm (Werbel and Carter, 2002). These
assertions emphasize that the positive corporate philanthropy –
firm performance relationship can be dampened due to the
possible agency costs arising from managerial discretions.
However, it should be noted that another source of impairments
might come from the stakeholders as well.
In another view, Wang et al. (2008) provide reasons on
how the stakeholders themselves limit their support of corporate
giving. According to Wang et al. (2008), stakeholders have a
certain threshold with regard to their support of CSR activities,
as continuing to do so brings lower profits. There exists a certain
point, wherein stakeholders are no longer willing to invest and
therefore, discontinue providing resources to the firm. Moreover,
exorbitant corporate philanthropy can also levy the costs of the
firm to its stakeholders (e.g., higher prices of products for
customers, lower salaries for employees, and lower return on
investments for investors). This is because although stakeholders
are inherently inclined to CSR initiatives, their willingness
begins to decline when engaging in such activities no longer
bring financial benefits (Wang et al., 2008).
Integrating the positive effects of corporate
philanthropy on firm performance, as presented by the
stakeholder and resource dependence perspective and the
negative effects of corporate philanthropy on firm performance
as suggested by agency costs, an inverse U – shaped curvilinear
relationship is expected (Brammer and Willington, 2008; Wang
Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
9 et al., 2008). To further reinforce this argument, we also look
into the existence of an optimal level of corporate philanthropy.
Godfrey (2005) presents an equation that identifies the level of
corporate philanthropy that produces the optimal moral capital
indicated as p*.5 Beyond this level, corporate philanthropy is
argued to stop creating any value for the firm (Godfrey, 2005).
This ‘stopping rule’ provides managers with information to
identify at what level corporate philanthropy will be able to
insure its relational wealth. Beyond this point, it is irrational to
further invest in corporate giving as it no longer has any
“insurance – like” properties. This argument reinforces that
initially corporate philanthropy positively affects firm
performance. However, at a certain level, it is unable to carry out
its functions; therefore, it begins to negatively affect firm
performance.
Coalescing the different theories and concepts
submitted in the previous discussions, an inverse U – shaped
relationship between corporate philanthropy and firm
performance becomes discernable. Figure 2 shows that at the
outset, corporate philanthropy is able to positively affect firm
performance by improving its reputation among its stakeholders
that hold resources critical to the survival of the firm. However,
due to agency costs, the relationship begins to decline at some
point.
Figure 2. The inverse U - shaped relationship between corporate
philanthropy and firm performance
In the next discussions, we posit that the complexity of
the corporate philanthropy and firm performance relationship
does not only arise from the shape it can take. Environmental
dynamism and consumer awareness are considered to be
moderating variables that play an integral part in the corporate
philanthropy – firm performance relationship.
Environmental Dynamism
In a summary of literature on corporate giving,
Vaidyanathan (2008) criticizes the neglect of industry – effects
in the study of the relationship between corporate philanthropy
and firm performance. Several empirical studies support the
notion that the environment a firm belongs to plays an integral
role in the corporate social performance – corporate financial
performance relation (Brammer and Millington, 2008; Knauer,
1994; Godfrey, 2005; Lev et al., 2008; Servaes and Tamayo,
2013; Wang et al., 2008). Environmental dynamism or industry
dynamics, is defined as the “frequency, the magnitude, and the
irregularity of changes of customer preferences, of changes in
competitive situation, and of technological changes during a
certain time span and within the boundaries of an industry”
(Hauschild et al., 2011, p. 425). Dess and Beard (1984) define
this as the “turbulence or instability facing an environment”.
How does environmental dynamism play in our understanding of
the relationship between corporate philanthropy and firm
performance?
Environmental dynamism can be viewed as a
moderating variable (Hauschild, 2008) as it ‘contours’ the
economic landscape (Servaes and Tamayo, 2013). Wang et al.
(2008) advance postulations on the function of environmental
dynamism. Firms in a very dynamic environment find it more
difficult to secure critical resources; therefore, they rely on
corporate philanthropy to increase their chances of acquiring
these resources. In view of our theoretical framework, firms in a
dynamic environment encounter more unexpected negative
events. Given that corporate philanthropy can mitigate the
effects of negative events, firms therefore desire more
engagements in CSR activities when faced with this type of
environment (Wang et al., 2008).
HYPOTHESIS I: There exists a curvilinear relationship between
corporate giving and firm performance, as financial
performance would keep on increasing as the firm increases its
level of corporate giving; however, due to the presence of
agency costs, it reaches a point wherein it would decrease firm
performance.
5
This argument follows the theoretical framework presented by
Godfrey (2005), which argues how corporate philanthropy can
create positive moral capital, therefore acting as insurance – like
protection to the relational wealth of the firm.
In another perspective, the distinction between
industries that require more stakeholder contact from those that
require less best exemplifies how environmental dynamism
influences the corporate philanthropy and firm performance
relationship (Knauer, 1994; Lev et al., 2008). Individual
consumers and industrial buyers have different criteria with
regards to purchasing decisions. High sensitivity firms or those
firms that are focused more on individual consumers (e.g.
retailers, banks) benefit more from corporate philanthropy
compared to low sensitivity firms, or firms that cater to the
government and corporations (Lev et al., 2008). Knauer (1994)
shares similar perceptions. Industries that are more exposed to
consumers rely more on ‘public relation efforts’, which include
corporate philanthropy. In an example by Brammer and
Millington (2008), consumer oriented firms, which have a higher
likelihood to be scrutinized by the public, engage more intensely
10 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
in corporate social activities, compared to firms in the electronic
equipment sectors. This implies that differences in the
characteristics of the industries affect how much a firm gives.
Perhaps another argument that can substantiate the
importance of industry – effects is the current position of the
industry and where it is in the product life cycle (Brammer and
Millington, 2008; Lev et al., 2008). Due to certain
macroeconomic reasons, there are industries that grow faster
compared to others. For example, in 2012, the Philippine real
estate sector is considered to be the fastest growing among all
industries in the country. Innately, it is possible that firms
belonging to this sector are able to give more charitable
contributions compared to other firms in other industries, as they
are able to profit more (Lowe, 2012). There are also industries
that are younger relative to other sectors. According to Brammer
and Millington (2008), newer industries are more vigorous with
CSR initiatives compared to older industries wherein firms have
lesser vents for investments.
These assertions argue that environmental dynamism
can augment the effect of corporate philanthropy on firm
performance. The next questions is, how so? According to Wang
et al. (2008), firms in a highly dynamic environment engage in
more corporate philanthropy, therefore increasing the chance of
vital resources, thus positively affecting firm performance.
However, whether the environment is highly or less dynamic,
the agency costs still remain (Wang et al., 2008).
Figure 3. The inverse U - shaped curvilinear relationship
between corporate philanthropy and firm performance is
enhanced as environmental dynamism affects the relationship
In summary, environmental dynamism seems to
enhance the benefits of corporate philanthropy on firm
performance but not the cost. Figure 3 summarizes how
environmental dynamism causes the upward curvature of the
corporate philanthropy – firm performance relationship to
become steeper (Wang et al., 2008). To illustrate, consider two
firms – one in a highly dynamic environment and the other in a
less dynamic environment. For every one unit invested in
corporate philanthropy, its effect on firm performance is greater
with the firm in the highly dynamic environment compared to
the firm in the lowly dynamic environment.
HYPOTHESIS II: Given the same level of corporate giving, the
more dynamic the industry to which a firm belongs, the greater
the effect of corporate philanthropy on firm financial
performance.
Consumer Awareness
A great deal of empirical research suggests that another
crucial element in understanding the corporate social
performance and corporate financial performance relationship is
consumer awareness. Apparently, publicizing CSR efforts to
stakeholders is of great importance in understanding the relation
(Godfrey, 2008; Knauer, 1994; Lev et al., 2008; Pecorino, 2012;
Servaes and Tamayo, 2013; Wang et al., 2008). Financial
benefits from corporate social activities can only be realized
when stakeholders are aware of them (Brammer and Millington,
2008). Godfrey (2005) argues that stakeholders should be
informed of the philanthropic activities of the firm. This allows
stakeholders to evaluate CSR initiatives, thereby creating moral
capital, which as we have discussed earlier, is a prerequisite to
increased firm performance (Godfrey, 2005). Literature also
provides compelling arguments on how advertising intensity, as
Servaes and Tamayo (2013) consider to best represent consumer
awareness6, influences the relationship. It is considered to be a
good measure of product differentiation, thus enabling increases
in firm performance (Wang et al., 2008). Scholars also believe
that corporate philanthropy can act in place of the functions of
advertising (Brammer and Millington, 2008; Lev et al., 2008,
Wang et al., 2008). Therefore, empirical studies often include
manifestations of advertising intensity as control variables in
their regression models (Brammer and Millington, 2008; Lev et
al., 2008, Wang et al., 2008).
In our study, we include advertising intensity as one of
our explanatory variables of interest, as the empirical research
suggests that it plays a relevant role in the corporate
philanthropy – firm performance relationship, given that
consumer awareness is a necessary condition before corporate
philanthropy can affect firm performance (Pecorino, 2012;
Servaes and Tamayo, 2013). Pecorino (2012) investigates how
charitable donations to a public good can increase the profits of
the firm, and find that CSR initiatives can only take effect when
consumers are aware of how their purchase of a product
produced by the firm can enhance the public good. Servaes and
Tamayo (2013) also find that when firms fail to advertise their
philanthropic efforts, corporate philanthropy alone negatively
affects firm performance.
6
In order to assure that advertising intensity best captures
consumer awareness, Servaes and Tamayo (2013) conduct
several regressions demonstrating different measures of
advertising.
11 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
How does consumer awareness affect the CSP – CFP
relationship? Literature suggests that it can either enhance or
dampen the impact of corporate philanthropy on firm
performance. For the first hypothesis on consumer awareness,
we allude to the study of Servaes and Tamayo (2013) that argue
that corporate philanthropy can positively affect the giving –
performance relationship. Their study lays a comprehensive
theoretical link bridging corporate philanthropy to firm
performance by focusing on one facet of our definition of
stakeholders – the consumers. Figure 4 shows how advertising
expenditures reveal the different attributes of the products of the
firm and the practices it follows. One of the attributes of a
product is CSR, and one of the practices of a firm is corporate
philanthropy (Servaes and Tamayo, 2013). Advertising intensity
can therefore enhance the awareness among consumers of the
CSR initiatives of the firm.
Figure 4. The framework presented by Servaes and Tamayo
(2013) illustrates the role of consumer awareness, as represented
by advertising intensity in the corporate philanthropy - firm
performance relationship
Advertising Intensity Product & Practices Awareness Practices (e.g. CSR) Increase in the Product Demand Servaes and Tamayo (2013) propose that the positive
pathway that leads CSP to CFP is through two links. First,
consumers are claimed to be more willing to pay more for
products produced by firms that engage in CSR activities.
Second, similar to Fisman et al. (2006), CSR activities act as
signals that the products produced by firms engaging in
corporate social activities are of high quality, therefore,
increasing the demand for these products. This angle subscribes
to the notion that consumer awareness, as represented by
advertising intensity can enhance the impact of corporate
philanthropy on firm performance.
However, it should be noted that Servaes and Tamayo
(2013) also suggest the possibility that high consumer awareness
does not always positively affect the CSP – CFP relationship.
Higher levels of advertising intensity can in fact dampen the
impact of corporate philanthropy on firm performance. For firms
with good reputation, the increase in consumer awareness
brought by advertising intensity can be greatly beneficial, but for
firms with bad statures, the higher consumer awareness
emphasizes their negative image, thereby decreasing firm
performance (Servaes and Tamayo, 2013). Thus, prior reputation
and consumer perception can alter the effects of advertising CSR
efforts (Godfrey, 2005; Pomering and Johnson, 2009; Servaes
and Tamayo, 2013). Godfrey (2005) argues that advertising of
corporate philanthropy can affect firm performance in either a
positive or negative way, based on the imputations of
stakeholders about the organization. Stakeholders can be
dubious, as they can discern whether an act is genuine or
ingratiating, that is the firm is just trying to do the act just for
the sake of doing it (Godfrey, 2005). In relation to this,
Pomering and Johnson (2009) extensively discuss how
stakeholders can be very skeptical with the CSR efforts of firms.
Individuals can recognize whether the philanthropic activities of
a firm are authentic or just mere manufactured publicity 7 .
Taking into consideration how firms can have motives other than
altruism, shareholders therefore become skeptical. Skepticism8,
with regards to corporate social responsibility, refers to the
disbelief and distrust on the motives and claims of firms brought
about by their actions (Forehand and Grier, 2003). According to
their study, the concept behind this skepticism can be
dichotomized into two theories – the cognitive response theory
and the social judgment theory. Cognitive response theory states
that in order for stakeholders to determine whether to be
skeptical or not with the CSR efforts of a firm, they associate
their past knowledge with the information they get from its
advertisements (Rossiter and Percy, 1997; Wright, 1973). On the
other hand, social judgment theory, considers the previous
judgments of other influential stakeholders (Rossiter and Percy,
1997; Eagly and Chaiken, 1993). These theories suggest that
consumers can negatively respond to the philanthropy
information a firm publicizes. Studies such as Morsing and
Schultz (2006) and Forehand and Grier (2003) find that indeed
philanthropic actions done by firms can be met with great
skepticism.
These assertions suggest that advertising intensity can
decrease the effect of corporate philanthropy on firm
performance when the firm has a poor reputation among
stakeholders. At the same time, stakeholders can be skeptical of
the firm, thereby inputting negative connotations on a
philanthropic act of a firm. This alternative angle subscribes to
the notion that consumer awareness, as represented by
advertising intensity, dampens the effect of corporate
philanthropy on firm performance.
The previous discussions submit that consumer
awareness, as represented by advertising intensity, can either
enhance or dampen the effect of corporate philanthropy on firm
performance. In the study of Servaes and Tamayo (2013) it is
hypothesized that CSR enters the equation linearly, as opposed
to our first hypothesis. Thus, at this point, we deviate from these
assertions by retaining the hypothesized curvilinear relationship
between corporate philanthropy and firm performance as seen on
Figure 5.
7
Pomering and Johnson (2009) define manufactured publicity as
the strategic fabrication of a firm image built through planned
marketing communication techniques in order to generate
awareness and preference for the brand.
8
According to Maignan and Ferrell (2001), skepticism
commonly arises in two instances. The first is the failure to
apprehend the social relevance or the social issue addressed by
the CSR effort. The second is when a firm engages in exorbitant
advertising, known as the self – promoters’ paradox (Ashforth
and Gibbs, 1990).
12 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
Figure 5. The inverse U - shaped curvilinear relationship
between corporate philanthropy and firm performance can be
enhanced or dampened by consumer awareness as represented
by advertising intensity
the years 2008 – 2012.9 We collect data from the electronic
databases Osiris and Orbis, and the annual reports of the firms
that are submitted to the PSE and the Securities and Exchange
Commission (SEC). Figure 6 shows the different data extracted
from the three sources. Osiris is a database that provides
information on the income statements, balance sheets, and cash
flows of over 38, 000 listed firms in the world (CEIBS, 2014).
Since we are interested only in firms listed in the PSE, this
information is extracted from Osiris. However, in constructing
the industrial dynamism variable, industry sales are needed. We
therefore rely on Orbis, a database that has information on both
listed and unlisted firms worldwide for this purpose (BvD,
2014). Finally for our key variables, we examine the annual
reports of our sample firms.
Table 2. Sources of Data
Source
Variable
Sales
Research and Development Expense
Long Term Debt
We propose that even without advertising intensity, in
view of resource dependence theory and stakeholder
management theory, corporate philanthropy can positively affect
firm performance. However, when a firm advertises its
philanthropic efforts and makes this known to its stakeholders,
the higher consumer awareness can enhance the impact of
corporate philanthropy on firm performance through an increase
in product demand. Alternatively, it can also dampen the
relationship through firm reputation and consumer skepticism.
Net Income
Total Assets
Industry Classifications (NAICS 2007
two – digit codes)
HYPOTHESIS III. A: Consumer awareness, as represented by
advertising intensity, can enhance the impact of corporate
philanthropy on firm performance.
Orbis
HYPOTHESIS III. B: Consumer awareness, as represented by
advertising intensity, can dampen the impact of corporate
philanthropy on firm performance
3.
Annual Financial
Statements
METHODOLOGY AND ECONOMETRIC
MODELING
In this section, we discuss the empirical framework of
our study – the sample and data collection, the variables we
examine, and the regression model that we employ in testing our
hypotheses.
Sample and Data Collection
For this study, we construct a balanced panel data based
on the firms traded in the Philippine Stock Exchange (PSE) for
Total Debt
Osiris
Total Industry Sales
Corporate Philanthropy (Charitable
Contributions Expense or CSR
Expense)
Advertising Expense
Table 3 shows the sample data reduction criteria that
we employ to arrive at our sample data. Following Brammer and
Millington (2008), we exclude financial institutions from our
sample because our variables require sales data. We filter our
data further by excluding the firms that went public during the
sample period. We also exclude delisted and suspended firms
9
We exclude firm – year observations on corporate philanthropy
and firm performance for years earlier than 2007, as our industry
dynamism variable for each year i requires data five years
preceding giving year i, including the giving year. Our data
source only provides information as far back as 2003.
13 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
during the period, in order to “minimize the potential influence
of factors related to listing and delisting that are difficult to
control for” (Wang et al., 2008, p. 149). Finally, we exclude
firms with missing information on the key variables.
Cit = vector of control variables
⎡
⎢
⎢
Cit = ⎢
⎢
⎢
⎢
⎣
Table 3. Sample Data Reduction
Potential Firms
291
Financial Institutions
(36)
Delisting and IPO after 2007
(98)
No Data
(13)
Remaining Firms
144
RESEARCH it
SIZEit
AGEit
LEVERAGEit
⎤
⎥
⎥
⎥
⎥
⎥
⎥
⎦
δ ′ = vector of coefficients for industry dummy variables
δ ′ = ⎡⎢ δ 1 δ 2 δ 3
⎣
Corporate Philanthropy and Firm Performance Relationship
… δ 14
⎤
⎥⎦
I i = vector of industry dummy variables 10 11
Similar to Wang et al. (2008), we test our hypotheses by
estimating the following equation.
PERFORMANCEt+1 = α 0 + β ′Git + θ ′Cit + δ ′ I i + ε it
where i is firm, and t is year
β ′ = vector of coefficients related to corporate giving
β ′ = ⎡⎢
⎣
β1 β 2
β3  β8
⎤
⎥⎦
Git = vector of variables related to corporate giving
⎡
⎢
⎢
⎢
⎢
⎢
⎢
Git = ⎢
⎢
⎢
⎢
⎢
⎢
⎢
⎣
GIVINGit
GIVINGit2
DYNAMISM it
ADVERTISINGit
GIVINGit × DYNAMISM it
GIVINGit2 × DYNAMISM it
GIVINGit × ADVERTISING it
GIVINGit2 × ADVERTISING it
⎤
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎦
θ ′ = vector of coefficients for control variables
θ ′ = ⎡⎢ θ1 θ 2 θ 3
⎣
θ 4 ⎤⎥
⎦
10
We use the agriculture, forestry, fishery, and hunting industry
as our base industry. Although there are a total of 20 two – digit
NAICS categories, our sample firms fall under 15 industries
only.
11
The full industry names as indicated in the NAICS 2007 two –
digit codes of some industries in the vector of industry dummy
variables are shortened for brevity. These industries are the
following: (1) Mining, Quarrying, and Gas Extraction (2)
Transportation and Warehousing (3) Real Estate and Rental and
Leasing (4) Professional, Scientific, and Technical Services (5)
Arts, Entertainment, and Recreation, (6) Accommodation and
Services (7) Administrative and Support and Waste Management
and Remediation Services. The rest of the industries are written
in their full names.
14 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
⎡
⎢
⎢
⎢
⎢
⎢
⎢
⎢
⎢
⎢
⎢
I=⎢
⎢
⎢
⎢
⎢
⎢
⎢
⎢
⎢
⎢
⎢
⎢
⎢⎣
I1 = Mining
I2 = Utilities
I3 = Construction
I4 = Manufacturing
I5 = Wholesale Trade
I6 = Retail Trade
I7 = Transportation
I8 = Information
I9 = Real Estate
I10 = Professional Scientific
I11 = Educational Services
I12 = Arts
I13 = Accommodation
I14 = Administrative
⎤
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥
⎥⎦
Market – based measure. On the other hand, market –
based measures, such as Tobin’s q are preferred over accounting
– based measures (Brammer and Millington, 2008; Servaes and
Tamayo, 2013; Wang et al., 2008). In contrast to the perspective
of Lev et al (2008) in assessing corporate philanthropy and firm
performance, Servaes and Tamayo (2013) argue that market –
based measures, which are inherently long – term, are more
appropriate. This is because the effects of corporate philanthropy
on firm performance, as a matter of fact, happens in the long –
run (Servaes and Tamayo, 2013).
Market – based measures capture market performance,
which is considered to be most relevant to stakeholders such as
investors and shareholders (Brammer and Millington, 2008;
Tsoutsoura, 2004). One main critique of market – based
measures is that they are affected by and do not control for
external factors such as risks (Brammer and Millington, 2008;
Servaes and Tamayo, 2013).
Given that both measures post benefits and drawbacks,
we employ both an accounting – based measure and market –
based measure for robustness: return on assets and Tobin’s q.
Return on Assets (ROA). ROA is used as the principle
accounting – based measure in our study. It is calculated as
earnings before interest and tax (EBIT) over total assets.
Dependent Variables
Literature reveals that corporate financial performance
in the CSP – CFP relation can be measured in different ways
(Margolis and Walsh, 2003; Orlitzky et al., 2003; Wood and
Jones, 1995). There has been a debate over whether to use
accounting – based measures (e.g., return on assets, return on
sales, return on equity) or marketing – based measures (e.g.,
Tobin’s q)12. Empirical studies criticize both measures as each
has its own flaws.
Accounting – based measure. Accounting – based
measures commonly include profitability measures such as
revenue, sales growth, return on sales, return on assets, and
return on equity. In view of the corporate social performance and
corporate financial performance relationship, Lev et al. (2008)
favor accounting – based measures such as sales growth and
revenue because they instantaneously reflect the reaction of
consumers to corporate giving. Moreover, accounting – based
measures give us a glimpse of internal decision – making, as
these measures are subject to the discretion of the managers
(Orlitzky et al., 2003). The influence of the managers also
reveals the weaknesses of accounting – based measures. These
measures are criticized for only taking into account the historical
aspect of the firm (Tsoutsoura, 2004). Thus, accounting ratios
can be subject to biases (Brammer and Millington, 2008;
Tsoutsoura, 2004) or even shenanigans.
12
Orlitzky et al. (2003) also discusses perception – based
measures as an alternative to accounting – based and marketing
– based measure. This measure constitutes surveys from
consumers. Given that the data available to construct this
measure is almost non – viable, we do not discuss it.
ROA =
EBIT
Total Assets
Tobin’s q. Tobin’s q is defined as the ‘market value of the firm
divided by the replacement value of its assets’ (Servaes and
Tamayo, 2013, p. 1050). Tobin’s q is used as the standard
market – based measure of firm performance (Brammer and
Millington, 2008; Servaes and Tamayo, 2013; Wang et al.,
2008). It is calculated as the ratio of the year – end market value
of common stock plus the book value of preferred stock and
book value of debt, and book value of total assets.
Year - end market value of Common Stock +
Book Value of Preferred Stock +
Tobin's q =
Book Value of Total Debt
Book Value of Total Assets
Literature suggests that the effect of corporate
philanthropy on accounting – based measures is lagged (Lev et
al., 2008; Wang et al., 2008). That is, corporate philanthropy in
year t is not presumed to influence firm performance in year t,
but affects future firm performance (Lev et al., 2008). Thus,
following Servaes and Tamayo (2013), we use the subsequent
year’s firm performance, which is the firm performance measure
Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
the year following the giving year. We indicate this with the time
subscript t+1.13
Key Variables
Giving. The level of corporate philanthropy is represented by the
peso amount of the charitable contributions expense.
Alternatively, there are firms that disclose it in various names
(e.g. CSR expense, donations). We assume that all of these
accounts pertain to the level of corporate philanthropy of the
firm. Comparable to Wang et al. (2008), we scale charitable
contributions expense by sales in order to account for the
possible effect of firm size. Thus, we calculate Giving as the
ratio of charitable contributions expense and sales.
GIVING =
Charitable Contributions Expense
Sales
Giving 2 . In order to capture the hypothesized inverted U –
shaped relationship between corporate philanthropy and firm
performance we include the square of our Giving variable in the
model (Wang et al., 2008).
Moderating Variables
Dynamism. In constructing the moderating variable Dynamism,
we follow the procedures employed by Wang et al. (2008) and
Des and Beard (1984). First, we obtain sales data of both
publicly – traded and privately – owned firms in the Philippines,
and construct the total sales of each industry (based on the
NAICS 2007 two – digit codes). Then, we regress each total
industry sales ‘over the five years preceding the giving year
(including the giving year) against time’ (Wang et al., 2008, p.
149). From this regression, we extract the standard error of the
regression coefficient related to the time dummy variable. We
then divide the standard error by the ‘average value’ of the
industry sales, to obtain a ‘standardized index for industry
dynamism’ (Wang et al., 2008, p. 149). This index represents
our Dynamism variable.
Advertising. Analogous to Servaes and Tamayo (2013), we
measure consumer awareness through the advertising intensity
of the firm. We calculate advertising intensity as the ratio of
advertising expenditures to sales.
ADVERTISING =
15 Advertising Expenditures
Sales
Control Variables
According to Lev et al. (2008), failure to control for
certain variables can lead to spurious correlations in the
corporate philanthropy and firm performance relationship.
Controlling for ‘contextual factors’ is also essential in studying
the relation (Brammer and Millington, 2008). In our study, we
include four control variables: research and development
(R&D), firm size, firm age, and leverage.
Research and Development. Omitting research and development
in the analysis of CSP – CFP is regarded to be one of reasons
why past studies are misspecified (McWilliams and Siegel, Lev
et al., 2008). Warusawitharana (2008) argues that research and
development, as a representation of innovation, can positively
affect profits. Following the literature, we also include research
and development in our regression model (Servaes and Tamayo,
2013; Tsoutsoura, 2004; Wang et al., 2008). We calculate the
variable Research as the ratio of research and development
expenditures and sales.
Research and Development
Expenditures
RESEARCH =
Sales
Firm Size. The size of the firm plays an important role in
understanding the relationship between corporate philanthropy
and firm performance. With regards to firm reputation, firm size
best represents firm visibility (Brammer and Millington, 2008).
It is also argued that larger firms engage in CSR activities more
(Tsoutsoura, 2004). Furthermore, the size of the firm influences
the investment opportunities of a firm (Servaes and Tamayo,
2013). Given these assertions, we include firm size as one of our
control variables. Following Wang et al. (2008), we calculate
firm size as the natural logarithm of total assets.
SIZE = ln(Book Value of Total Assets)
Firm Age. According to Wang et al. (2008), the age of the firm
can affect firm performance, as it manifests firm
competitiveness. In view of corporate philanthropy, newer firms
tend to disregard philanthropic efforts as they focus more on
product development (Brammer and Millington, 2008). We
calculate firm age by taking the natural logarithm of the
difference between the current year and the IPO year of the firm
(Wang et al., 2008).
AGE = ln(Current Year - IPO Year)
13
Wang et al. (2008), measure subsequent firm performance as
the average of the firm performance measures three years
following the giving year. However this is not a standard
practice in the literature when measuring future performance.
Leverage. Firms that are more profitable are argued to be more
inclined to charitable contributions. On the other hand, firms
with excessive debts are less willing to initiate CSR efforts, as
they would rather utilize their profits to settle their debts
(Brammer and Millington, 2008). We calculate leverage as the
16 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
ratio of the book value of long – term debt to the book value of
total assets.
LEVERAGE =
Book Value of Total Debt
Book Value of Total Assets
Industry Dummies. 14 To control for industry effects, we use
industry dummy variables. These are described in appendix A.
Estimation Method
We estimate our main equation using standard panel
data techniques15, which include the fixed effects model (FEM),
the random effects model (REM), and the pooled OLS model.
Servaes and Tamayo (2013) recommend a firm – fixed effects
model in order to consider possible spurious regressions.
However, our model includes dummy variables that are time –
invariant, which renders the fixed effects model infeasible. We
employ the Breusch – Pagan test of the null hypothesis that there
exist no random effects ( σ u = 0 ) versus the alternative
hypothesis that there are random effects in order to determine
which of the pooled OLS models and the random effects models
is appropriate for our study (Gujarati and Porter, 2009). After
running the Breusch – Pagan tests on our regression models, it is
found that random effects model is the more appropriate
estimation technique.
2
14
In the previous section, we argue that inter – industry effects
exists, that is, there are industries that naturally give more
compared to others. To control for this, Wang et al. (2008) used
industry – adjusted measures for the key variables
PERFORMANCE (ROA and Tobin’s q) and GIVING (corporate
giving). To construct the industry – adjusted measure for
PERFORMANCE, the average industry performance is
extracted, thereafter subtracted to the each observation. For the
industry – adjusted measure for GIVING, the similar method is
employed. The average industry giving is subtracted to each
giving observation. This method is not applicable in our study
for a two reasons. First, the data set of Wang et al. (2008)
includes all firms (publicly listed or not listed). Second, taking
into account the relatively small size of our sample, taking the
average of an industry may result in imprecise and biased
conclusions because a small sample is prone to outliers in the
data set. Instead, we use industry dummies to account for
industry effects.
15
In Wang et al. (2008), the sample firms included are only
those with corporate giving. Therefore, they first employ the
Heckman selection in order to account for possible sample
selection bias. In our study, our sample firms include both that
have charitable contributions and no charitable contributions,
and thus we do not utilize the Heckman selection model. 4.
RESULTS AND DISCUSSIONS
Table 4.
Descriptive Statistics
Variable
Mean
S.D.
Min
Max
TOBINS
1.267502
1.105131
0.0156087
8.185662
ROA
0.0686559
0.1204723
-0.7744
0.6641
DYNAMISM
0.1511637
0.1189992
0.0081607
0.6379873
SIZE
22.49718
2.003604
17.0839
27.51509
AGE
3.328831
0.853433
0.0000
4.59512
LEVERAGE
0.1949866
0.219299
0.0000
2.499313
RD
0.0048018
0.0270231
0.0000
0.3604665
ADVERTISING
0.0248744
0.069078
0.0000
0.7926224
GIVING
0.0038388
0.0195523
0.0000
0.2623417
FIRM – YEARS
576
Table 4 presents the descriptive statistics of the
variables used in our study. In this discussion, we look into the
annual means of each of our key variables. For the variable
GIVING, it is seen that on average, firms pledge 0.38% of their
net sales to corporate philanthropy. The generated statistics
reveal as well that there are firms that give as much as 26.23%,
while there are firms that do not have giving at all. The firm with
the highest charitable contributions expense belongs to the
mining industry. We expound on this result later in the following
discussions. For the variable DYNAMISM, the average
dynamism across all firms is 0.1511637. The most dynamic out
of our fifteen industries is the construction industry with the
dynamism value of 0.6379873. On the other hand, the least
dynamic among industries would be the utilities industry,
garnering only a dynamism value of 0.0081607. For the variable
ADVERTISING, it is found that, on average, firms spend 2.49%
of their net sales on advertising. The firm with the
highest advertising intensity belongs to the mining industry,
spending as high as 79.26% of its net sales. On the other hand,
there are firms that do not spend on advertising at all.
Table 5 shows the number of firms in each industry. It
shows that a close to a quarter of our sample is from the
manufacturing industry. Other industries that make a big chunk
of our sample are the real estate, mining, and information
industries. Although this table shows which industry dominates
our sample, it does not reveal which industry has the highest
number of firms that engage in corporate philanthropy. Table 6
presents the number of firms that give corporate philanthropy for
each of the fifteen industries per year. Due to its size, it is
expected that the manufacturing industry will have the most
number of firms that give in charitable contribution for most
years. Following the manufacturing industry are the real estate
industry, the mining industry, and the information industry. A
possible explanation as to why these industries engage the most
in corporate philanthropy is the fact that these industries are
considered to be customer-based industries. Customer–based
17 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
industries generally produce products and services that are for
individual consumers, as opposed to industrial – based
industries, whose products and services are generally geared
towards industries and the government. Customer – based
industries are said to likely engage more in corporate
philanthropy since their products and services cater to relatively
more sensitive individual customers and not to industrial users.
Given that the manufacturing, real estate, and information
industries produce products and services whose end – users are
predominantly individual customers, it follows that they engage
more in charitable contributions. Although we have identified
that the manufacturing industry has the most firms that give
charitable contributions, it is important to bear in mind that this
does not suggest that the manufacturing industry gives the most.
Thus, in Table 7, we generate the average corporate philanthropy
of each industry per year. It shows that the mining industry,
despite having less firms that than the manufacturing industry,
has in fact the highest average corporate philanthropy surpassing
the manufacturing industry.
Table 8 presents the average dynamism of our
industries in each year. This table reveals the general trend of
sales over time of each industry. Consistent with our findings on
the DYNAMISM variable in the descriptive statistics, the
construction industry remains to be the most dynamic among all
industries, in all years. On the other hand, the utilities industry is
the least dynamic industry. Interpreting this using our definition
of environmental dynamism, it is much more difficult to acquire
vital resources for firms in the construction industry, whereas in
the utilities industry, there seem to be a free flow of resources as
firms are able to secure all their necessary inputs.
Table 5.
Number of firms in each industry
Industry
Number of
Firms
Mining, Quarrying, And Gas Extractions
19
Utilities
11
Construction
7
Manufacturing
35
Wholesale Trade
2
Retail Trade
1
Transportation And Warehouse
5
Information
14
Real Estate And Rental And Leasing
31
Professional And Scientific And Technical Services
3
Educational Services
2
Arts, Entertainment And Recreation
Table 6.
Number of firms that give corporate philanthropy per industry
per year
Industry
2008
2009
2010
2011
Mining, Quarrying, And Gas
Extractions
Utilities
Construction
6
6
9
11
3
3
3
3
3
0
4
2
Manufacturing
9
10
15
16
Wholesale Trade
0
0
0
2
Retail Trade
1
1
1
1
Transportation And
Warehouse
Information
0
0
0
1
4
4
5
5
Real Estate And Rental And
Leasing
Professional And Scientific
And Technical Services
Educational Services
11
12
11
15
1
1
1
1
2
1
1
1
Arts, Entertainment And
Recreation
Accommodation And
Services
Administrative And Support
And Waste Management
And Remediation Services
Agriculture, Forestry,
Fishery, And Hunting
1
1
1
1
5
5
5
5
1
1
0
1
0
0
0
0
Table 9 shows the average advertising expenditure of
each industry per year. This unveils a pattern on how advertising
– intensive our industries are. There is a trend wherein the same
industries that have the highest number of firms that engage in
corporate philanthropy – namely, the manufacturing industry,
real estate industry, and information industry - are the same
industries that also have the highest average advertising
expenditures, with the addition of industries such as the arts
industry and the retail trade industry. It can be inferred that
indeed corporate philanthropy goes hand in hand with
advertising; that is, firms feel the need to publicize CSR
initiatives for it to have some effect on firm performance
(Godfrey, 2008; Knauer, 1994; Lev et al., 2008; Pecorino, 2012;
Servaes and Tamayo, 2013; Wang et al., 2008).
Table 7.
Average corporate philanthropy of each industry per year
(Charitable Contributes Expense/Sales)
Industry
2008
2009
2010
2011
3
Across All Industries
0.2290%
0.5538%
0.3280%
0.4248%
Accommodation And Services
Administrative And Support And Waste Management And
Remediation Services
Agriculture, Forestry, Fishery, And Hunting
7
Mining, Quarrying, And Gas
Extractions
0.4881%
1.8149%
1.0511%
1.3534%
1
Utilities
0.0005%
0.0098%
0.0013%
0.0052%
3
Construction
0.2372%
0.6049%
0.0000%
0.2128%
Total
144
Manufacturing
0.0599%
0.1265%
0.1372%
0.1698%
Wholesale Trade
0.0000%
0.0000%
0.0000%
0.0979%
18 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
Retail Trade
0.1172%
0.1121%
Transportation And
Warehouse
0.0000%
0.0000%
Information
0.2191%
0.1174%
Real Estate And Rental And
Leasing
Professional And Scientific
And Technical Services
Educational Services
Arts, Entertainment And
Recreation
Accommodation And
Services
Administrative And Support
And
Waste Management And
Remediation Services
Agriculture, Forestry,
Fishery, And Hunting
0.0588%
0.0735%
Manufacturing
1.9384%
2.1829%
2.4907%
3.1846%
0.0000%
0.0559%
Wholesale Trade
0.1826%
0.0877%
0.1851%
2.4444%
0.0844%
0.1276%
Retail Trade
2.9331%
2.3020%
2.7492%
2.5939%
Transportation And
Warehouse
0.0793%
0.0843%
0.0518%
0.0678%
Information
4.5355%
1.1699%
1.4431%
7.2535%
2.0811%
2.2229%
2.2466%
5.2167%
0.2326%
0.1620%
0.2707%
0.4643%
0.6576%
0.0843%
0.0931%
0.0570%
6.3892%
3.8857%
4.7416%
0.4049%
1.5426%
1.8988%
2.7026%
1.4353%
4.3274%
5.5892%
4.8530%
4.7803%
0.0208%
0.0085%
0.0102%
0.0061%
0.3915%
0.8546%
0.3981%
0.6775%
0.1896%
0.1843%
0.2293%
0.7249%
0.2623%
0.4099%
0.5425%
0.3879%
0.0000%
0.0277%
0.0338%
0.0453%
0.5351%
1.0593%
1.1409%
0.4353%
0.1587%
0.1484%
0.0000%
0.3305%
0.0000%
0.0000%
0.0000%
0.0000%
Table 8.
Average dynamism of each industry per year
Industry
2008
2009
2010
2011
Mining, Quarrying, And Gas
Extractions
0.1010
0.1556
0.1450
0.1288
Utilities
0.0171
0.0082
0.0378
0.0318
Construction
0.6380
0.6345
0.5406
0.3732
Manufacturing
0.1409
0.1267
0.1624
0.1132
Wholesale Trade
0.1365
0.0881
0.1061
0.0777
Retail Trade
0.1280
0.1366
0.1275
0.0691
Transportation And
Warehouse
0.2761
0.3277
0.3147
0.0980
Information
0.1134
0.1638
0.0684
0.0800
0.1516
0.1047
0.1151
0.0940
0.2487
0.1207
0.2639
0.1919
0.1277
0.0900
0.1031
0.0832
0.5374
0.2230
0.4435
0.4426
0.2996
0.3202
0.2539
0.1379
0.3406
0.3128
0.2122
0.2165
0.1245
0.1066
0.1047
0.1365
Real Estate And Rental And
Leasing
Professional And Scientific
And Technical Services
Educational Services
Arts, Entertainment And
Recreation
Accommodation And
Services
Administrative And
Support And
Waste Management And
Remediation Services
Agriculture, Forestry,
Fishery, And Hunting
Table 9.
Average advertising per industry per year (Advertising
Expense/Sales)
Industry
2008
2009
2010
2011
Across All Industries
2.0683%
1.8042%
2.3273%
3.7500%
Mining, Quarrying, And Gas
Extractions
2.7251%
1.9255%
4.5555%
6.3846%
Utilities
0.0043%
0.0159%
0.0609%
0.0163%
Construction
1.4414%
3.8917%
4.0680%
2.6285%
Real Estate And Rental And
Leasing
Professional And Scientific
And Technical Services
Educational Services
Arts, Entertainment And
Recreation
Accommodation And
Services
Administrative And Support
And
Waste Management And
Remediation Services
Agriculture, Forestry,
Fishery, And Hunting
Estimation Results
We employ the random effects model to estimate our
main equation and test our three hypotheses on the effect of
corporate philanthropy on firm performance. We report the
Driscoll and Kraay standard errors that are robust to serial
correlation and heteroscedasticity. 16 According to Vogelsang
(2008), this corrects for heteroscedasticity and serial correlation,
as the heteroscedasticity autocorrelation covariance matrix
estimators (HAC) are robust to autocorrelation and
heteroscedasticity.
We begin with a base regression (A1, B1) that includes
only the control variables, industry dummy variables, and the
variable DYNAMISM. We then add more explanatory variables
to the base equation until we arrive at our complete model (A7,
B7). Our discussion is primarily divided into two parts. We first
discuss our estimation results where Tobin’s q is used as our
firm performance measure. Then we proceed to discuss the
estimation results using ROA as our firm performance measure.
Tobin’s q Estimates. Table 10 shows our estimation
results where the measure of firm performance is Tobin’s q. In
the base model (A1), there is weak evidence that dynamism
negatively affects firm performance. This is consistent with our a
– priori expectation, supporting our argument that firms find it
more difficult to secure critical resources when the environment
they belong to is highly dynamic, thereby having a negative
effect on firm performance. In the next model (A2), we add the
variable RD to the equation. When the variable is added, all
variables become insignificant, including the variable
DYNAMISM.
16
In the study of Wang et al. (2008), they control for serial
correlation by including a lagged performance variable as an
additional regressor in their estimated models.
19 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
GIVINGxDYNAMISM and GIVING2xDYNAMISM into
the equation. In this model (A6), we find that (1) the coefficients
of GIVING and GIVING2 become insignificant and (2) the
coefficients of the interaction variables related to corporate
philanthropy and dynamism are insignificant. This is
inconsistent with our hypothesis that dynamism enhances the
effect of corporate philanthropy on firm performance. Our last
hypothesis involves the effect of consumer awareness, as
represented by advertising intensity, enhancing or dampening the
relationship between corporate philanthropy and firm
performance. When we add GIVINGxADVERTISING and
GIVING2xADVERTISING into the equation (A7), we find that
(1) the coefficient of GIVING is significantly positive and the
coefficient of GIVING2 is significantly negative, indicating the
inverse U-shaped relationship between corporate philanthropy
and firm performance, which supports our hypothesis H1 and (2)
the coefficient GIVINGxADVERTISING is negatively significant
while the coefficient of GIVING2xADVERTISING is positively
significant, which is consistent with our Hypothesis III. B that
consumer awareness as represented by advertising intensity
dampens the impact of corporate philanthropy on firm
performance.
Table 10.
Random effects model estimates of firm characteristics and industry dummies on firm performance. Firm performance = Tobin's q
Model
A1
A2
A3
A4
A5
A6
A7
DYNAMISM
-1.267*
-1.266
-1.286*
-1.324*
-1.365*
-1.079
-1.054
-0.766
-0.769
-0.773
-0.785
-0.792
-0.661
-0.645
SIZE
AGE
LEVERAGE
0.004
0.004
0.008
0.009
0.012
0.016
0.009
-0.049
-0.049
-0.049
-0.049
-0.05
-0.051
-0.052
-0.069
-0.069
-0.076
-0.081
-0.085
-0.084
-0.08
-0.119
-0.119
-0.118
-0.118
-0.118
-0.118
-0.118
-0.033
-0.033
-0.038*
-0.042
-0.043
-0.046
-0.036
-0.221
-0.221
-0.222
-0.222
-0.223
-0.225
-0.226
0.083
0.264
-0.49
-1.005
-1.583
-1.661
-0.692
-0.684
-0.963
-1.173
-1.446
-1.974
-0.803*
-0.894*
-1.089*
-1.129**
-0.456
-0.473
-0.508
-0.555
-0.554
-0.377
0.003
0.014*
0.033
0.057*
-1.977
-7.434
-20.984
-29.405
-0.054*
-0.14
-0.269**
-27.866
-122.163
-105.691
-0.108
-0.118
-89.583
-88.979
RD
ADVERTISING
GIVING
C
GIVING2
C
GIVINGXDYNAMISM
GIVING2XDYNAMISM
0.502
0.757
-622.413
-667.966
GIVINGXADVERTISINGC
-0.176***
-56.453
GIVING2XADVERTISING
C
0.816***
-144.654
I1
I2
I3
0.585
0.586
0.618
0.574
0.547
0.526
0.492
-0.367
-0.366
-0.365
-0.375
-0.381
-0.388
-0.392
0.066
0.067
0.052
0.03
0.009
0.024
0.04
-0.393
-0.391
-0.389
-0.397
-0.403
-0.404
-0.406
0.415
0.414
0.436
0.441
0.434
0.42
0.397
-0.487
-0.488
-0.487
-0.496
-0.502
-0.491
-0.487
20 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
I4
I5
I6
I7
I8
I9
I10
I11
I12
I13
I14
0.231
0.232
0.249
0.236
0.22
0.208
0.173
-0.314
-0.312
-0.311
-0.319
-0.325
-0.332
-0.335
0.374
0.376
0.38
0.363
0.355
0.356
0.34
-0.454
-0.453
-0.461
-0.47
-0.478
-0.484
-0.475
1.599***
1.600***
1.612***
1.596***
1.576***
1.560***
1.540***
-0.298
-0.296
-0.294
-0.303
-0.309
-0.316
-0.319
0.237
0.238
0.24
0.231
0.226
0.191
0.183
-0.341
-0.339
-0.338
-0.344
-0.349
-0.352
-0.353
0.600*
0.601*
0.626*
0.615*
0.601
0.597
0.553
-0.352
-0.351
-0.351
-0.358
-0.365
-0.373
-0.377
0.184
0.184
0.2
0.178
0.144
0.127
0.107
-0.371
-0.371
-0.372
-0.379
-0.386
-0.392
-0.396
-0.042
-0.041
-0.041
-0.055
-0.072
-0.099
-0.125
-0.338
-0.336
-0.336
-0.342
-0.345
-0.351
-0.348
0.695
0.695
0.699*
0.691*
0.668
0.658
0.6
-0.423
-0.424
-0.423
-0.419
-0.407
-0.4
-0.379
0.923*
0.924*
0.961*
0.962*
0.973*
0.895
0.85
-0.551
-0.55
-0.559
-0.563
-0.569
-0.562
-0.547
0.446
0.448
0.464
0.432
0.354
0.387
0.257
-0.538
-0.536
-0.534
-0.529
-0.511
-0.525
-0.498
0.297
0.298
0.328
0.311
0.296
0.271
0.214
-0.43
-0.428
-0.429
-0.433
-0.436
-0.437
-0.436
Results of Breusch-Pagan test of the null hypothesis that there exist no random effects against the alternative that there exist random effects.
CHIBAR2(01)
319.57
319.56
320.45
320.9
318.3
321
325.53
P - Value
0
0
0
0
0
0
0
Estimation Technique
RE
RE
RE
RE
RE
RE
RE
*** Significant at 0.01; ** Significant at 0.05; * Significant at 0.10. Standard errors are shown in parenthesis. B coefficients multiplied by 103. C
coefficients multiplied by 10-3.
ROA Estimates. Table 11 tabulates our estimates using
ROA as our financial measure. In the base model (B1), our base
regression estimates show that all variables are insignificant
except for the variable SIZE, which has a positively significant
effect on firm performance. With the introduction of the variable
RD into the equation, as seen in the model (B2), SIZE remains to
be the only significant variable. In the next model (B3), we add
the variable ADVERTISING into the equation. The story persists,
as all variables remain to be insignificant and variable SIZE
positively affecting firm performance.
In the following model (B4) we add our first key
variable, GIVING. Similar to ROA, the variable is insignificant.
To test whether the curvilinear relationship exists when ROA is
the firm performance measure, we add GIVING2 into the
equation. As seen in the model (B5), the variable GIVING is
negative and weakly significant, however, the variable
GIVING2, albeit negative, is insignificant. This suggests that the
curvilinear relationship between corporate philanthropy and firm
performance does not exist when ROA is used as the firm
performance measure. One possible reason for this result is the
fact that ROA is a short – term measure, hence suggesting that
GIVING has no effect on firm performance in the short – run.
This is reinforced with the results of our Tobin’s q estimates, as
Tobin’s q is a long – term financial performance measure. The
insignificant ROA result is consistent with literature, as Wang et
al. (2008) and Griffin and Mahon (1997) also find no
relationship between corporate philanthropy and firm
performance when ROA is used as the firm performance
measure.
21 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
Table 11.
Random effects estimates of firm characteristics and industry dummies on firm performance. Firm performance = ROA
Model
B1
B2
B3
B4
B5
B6
B7
DYNAMISM
0.03
0.032
0.038
0.041
0.042
0.049
0.046
-0.049
-0.049
-0.05
-0.05
-0.05
-0.052
-0.052
0.011***
0.011***
0.010**
0.010**
0.010**
0.010**
0.011**
-0.004
-0.004
-0.004
-0.004
-0.004
-0.004
-0.004
-0.011
-0.011
-0.01
-0.01
-0.009
-0.009
-0.01
-0.012
-0.012
-0.012
-0.012
-0.012
-0.012
-0.012
-0.045
-0.046
-0.043
-0.043
-0.043
-0.043
-0.044
-0.044
-0.044
-0.044
-0.045
-0.045
-0.045
-0.045
0.11
0.072
0.123
0.152*
0.119
0.129
-0.079
-0.097
-0.09
-0.082
-0.11
-0.111
SIZE
AGE
LEVERAGE
RD
ADVERTISING
0.18
0.187
0.197
0.196
0.157
-0.13
-0.131
-0.135
-0.135
-0.112
-0.192
-0.673*
-0.395
-1.809
-0.126
-0.392
-0.635
-1.111
2.322
2.847
11.334
-1.525
-5.849
-7.919
-1.827
-1.004
-2.461
-2.425
-4.134
-25.182
-32.164
-39.349
GIVING
GIVING2
GIVINGXDYNAMISM
GIVING2XDYNAMISM
GIVINGXADVERTISING
10.519
-8.929
GIVING2XADVERTISING
-50.934
-44.956
I1
I2
I3
I4
I5
I6
I7
I8
I9
-0.03
-0.029
-0.036
-0.033
-0.032
-0.032
-0.03
-0.047
-0.047
-0.047
-0.048
-0.048
-0.048
-0.048
-0.003
-0.002
0
0.002
0.003
0.003
0.002
-0.044
-0.044
-0.044
-0.044
-0.044
-0.044
-0.045
-0.062
-0.064
-0.069
-0.069
-0.069
-0.07
-0.068
-0.057
-0.057
-0.057
-0.057
-0.057
-0.057
-0.057
-0.017
-0.016
-0.02
-0.019
-0.018
-0.019
-0.017
(0.042))
-0.042
-0.043
-0.043
-0.043
-0.043
-0.043
-0.005
-0.003
-0.003
-0.002
-0.002
-0.002
-0.002
-0.042
-0.043
-0.043
-0.043
-0.043
-0.044
-0.044
0.012
0.013
0.01
0.011
0.012
0.011
0.013
-0.042
-0.042
-0.042
-0.042
-0.042
-0.042
-0.043
-0.015
-0.014
-0.014
-0.013
-0.013
-0.014
-0.013
-0.054
-0.054
-0.054
-0.055
-0.055
-0.055
-0.055
-0.019
-0.018
-0.023
-0.022
-0.022
-0.022
-0.02
-0.046
-0.046
-0.046
-0.047
-0.047
-0.047
-0.047
-0.035
-0.035
-0.038
-0.037
-0.036
-0.036
-0.035
22 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
I10
I11
I12
I13
I14
-0.048
-0.048
-0.048
-0.048
-0.049
-0.049
-0.049
-0.04
-0.039
-0.039
-0.038
-0.037
-0.038
-0.037
-0.072
-0.073
-0.072
-0.072
-0.072
-0.073
-0.073
0.052
0.052
0.052
0.052
0.053
0.053
0.056
-0.047
-0.048
-0.048
-0.049
-0.05
-0.049
-0.051
0.046
0.047
0.039
0.039
0.039
0.037
0.04
-0.098
-0.098
-0.095
-0.095
-0.095
-0.095
-0.096
-0.028
-0.027
-0.03
-0.028
-0.024
-0.024
-0.017
-0.048
-0.049
-0.05
-0.05
-0.049
-0.049
-0.05
-0.037
-0.036
-0.043
-0.042
-0.041
-0.042
-0.039
-0.05
-0.051
-0.051
-0.051
-0.051
-0.051
-0.052
Results of Breusch-Pagan test of the null hypothesis that there exist no random effects against the alternative that there exist random effects.
CHIBAR2(01)
135.27
135.29
139.11
138.39
138.3
137.18
138.33
P - Value
0
0
0
0
0
0
0
Estimation Technique
RE
RE
RE
RE
RE
RE
RE
*** Significant at 0.01; ** Significant at 0.05; * Significant at 0.10. Standard errors are shown in parenthesis. B coefficients multiplied by 103. C
coefficients multiplied by 10-3.
Despite the nonexistence of a curvilinear relationship,
we still test our second and third hypothesis. With the
introduction of our dynamism – related variables into the
equation, as seen in the next model (B6), both GIVINGx
DYNAMISM and GIVING2xDYNAMIDM as expected have no
significant effects. We therefore find no evidence that dynamism
enhances the relationship of corporate philanthropy and firm
performance. Lastly, to test our third hypothesis, we introduce
GIVINGxADVERTISING and GIVING2x ADVERTISING into
the equation. The last model (B7) shows that similar to the
estimates in testing dynamism, our advertising interaction
variables are insignificant. Thus, we do not find evidence that
consumer awareness can enhance or dampen the impact of
corporate philanthropy on firm performance.
Final Model Estimates. At this juncture, we find that the
relationship between corporate philanthropy and firm
performance only holds when a long – term measure, such as
Tobin’s q, is used. Moreover, we find no evidence that
dynamism enhances the impact of corporate philanthropy on
firm performance. However, it is found that consumer
awareness, as represented by advertising intensity, dampens the
relation. Given that we find support for our hypothesis on
consumer awareness, it would be of interest whether this
relationship would still hold when we remove our dynamism –
related variables.
Table 12.
Random effects model estimates of firm characteristics and industry dummies on firm performance. Firm performance = Tobin's q.
Variable
Coefficient
Standard Error
GIVINGC
GIVING2C
GIVINGXADVERTISINGC
GIVING2XADVERTISINGC
SIZE
AGE
LEVERAGE
ADVERTISING
RD
I1
I2
I3
0.035*
-0.140**
-0.174***
0.795***
0.011
-0.060
-0.031
-0.377
-1.023
0.521
0.175
-0.132
(18.218)
(64.692)
(60.917)
(177.325)
(0.051)
(0.118)
(0.226)
(0.380)
(1.280)
(0.383)
(0.398)
(0.365)
23 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
I4
0.201
(0.327)
I5
0.393
(0.462)
I6
1.569***
(0.310)
I7
0.096
(0.339)
I8
0.599
(0.370)
I9
0.149
(0.388)
I10
-0.194
(0.335)
I11
0.641*
(0.386)
I12
0.561
(0.530)
I13
0.082
(0.454)
I14
0.098
(0.422)
Results of Breusch-Pagan test of the null hypothesis that there exist no panel effects against the alternative that there exist panel
effects.
P - Value
0.0000
Estimation Technique
RE
*** Significant at 0.01; ** Significant at 0.05; * Significant at 0.10. Standard errors are shown in parenthesis. B coefficients multiplied by 103. C
coefficients multiplied by 10-3.
Therefore, we estimate an equation that attempts to look into the
distinct effects of advertising intensity on the relationship
between corporate philanthropy and firm performance. For our
final model, we exclude all dynamism - related variables, which
include
DYNAMISM,
GIVINGxDYNAMISM,
and
GIVING2xDYNA-MISM. Furthermore, given that we only find
evidence when Tobin’s q is the firm performance measure, we
exclude the use of ROA as a measure of firm performance. The
results of estimating the final model are shown in Table 12 that
only looks into the effect of advertising intensity on the
relationship of corporate philanthropy and firm performance.
Our final model shows that the variables GIVING and GIVING2
are both statistically significant, with GIVING having a positive
coefficient and GIVING2 having a negative coefficient. This
supports our first hypothesis (H.I) that a curvilinear relationship
between corporate philanthropy and firm performance exists.
Moreover, the variables GIVINGxADVERTISING and
GIVING2x
ADVERTISING
are
both
significant,
GIVINGxADVERTISING has a negatively significant coefficient
and GIVING2x ADVERTISING has a positively significant
coefficient. Thus, this affirms our hypothesis III. B that
consumer awareness dampens the impact of corporate
philanthropy on firm performance.
indigenous groups, and destroying the environment. Going back
to Godfrey (2005), it is possible therefore for stakeholders to
look past the CSR efforts of the mining firms, thereby
decreasing the effect of corporate philanthropy on their financial
performance. This is further reinforced with the arguments
presented by Pomering and Johnson (2009), which assess
philanthropic efforts based on their past perceptions on the firm.
This study reveals that consumer awareness, as
represented by advertising intensity, dampens the relationship
between corporate philanthropy and firm performance. As
posited by most literature, advertising can indeed suppress the
relation. A possible explanation can be found by looking back to
our descriptive statistics. One of our findings is that the mining
industry is home to the top contributor firms when it comes to
corporate philanthropy. The mining industry in the Philippines is
often portrayed to have a negative social image among its
stakeholders. According to Bureau, M. A., & Hubo, C. 2003),
despite its constant effort to help the community, the Philippine
mining industry is remembered for dislocating families and
We found significant evidence to support the
curvilinear relationship between corporate philanthropy and
corporate financial performance affirming the analogous
hypothesis of Wang et al. (2008) that initially, corporate
philanthropy positively contributes to corporate financial
performance at a decreasing rate. However, due to agency costs,
corporate philanthropy may negatively affects corporate
financial performance at higher levels. This implies the existence
of an optimal level of corporate philanthropy in order to
maximize corporate financial performance.
5.
CONCLUSION
The motivation of this study is to investigate the
relationship between corporate philanthropy and corporate
financial performance in the Philippine setting. Our study
attempts to provide a pathway that links the two. We post three
core hypotheses - (1) there exists a curvilinear relationship
between corporate philanthropy and corporate financial
performance; (2) industry dynamism affects the relationship of
corporate philanthropy and corporate financial performance; and
(3) consumer awareness as represented by advertising intensity
affects the relationship between corporate philanthropy and
corporate financial performance. To test these hypotheses, we
employ a random effects model using data of Philippine publicly
listed firms for the years 2008-2012.
24 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
We do not find evidence that industry dynamism affects
the corporate philanthropy-performance relationship. This is in
contrast to the findings of Wang et al. (2008) that dynamism
affects the philanthropy-performance relationship. From a
statistical perspective, a likely reason why our second hypothesis
had insignificant results is the dearth of available data as our
sample of 144 firms is quite small compared to Wang et al.’s
(2008) sample of about 1000 firms. Despite this limitation, our
study is able to show a statistically significant relationship
between corporate philanthropy and corporate financial
performance. We believe that if equipped with a bigger sample
size, a study of similar nature would be able to find stronger
results as to the philanthropy-performance relationship and
might be able to support the effect of dynamism on the
philanthropy-performance relationship.
Finally, we find evidence that shows the dampening
effect of advertising on the corporate philanthropy-corporate
financial performance relationship. This supports our hypothesis
III. B that advertising intensity can reduce the effect of
Philanthropy on firm performance depending on societal
perceptions. This applies well to our sample, as out of 144 firms,
less than a third engaged in corporate philanthropy. Furthermore,
most of the prominent giving firms operate in the mining
industry, an industry with public image problems due to the
environmental damage inherent in their regular business
operations. Also, the manufacturing and real estate industries are
reliant and sensitive to stakeholders’ perception. Thus, their
advertising efforts do not translate to positive consumer
awareness but rather give rise to stakeholder skepticism
(Pomering and Johnson, 2009).
6.
RECOMMENDATION
Our study provides evidence on a relationship between
corporate philanthropy and corporate financial performance in
the Philippines. This result suggests that firms should positively
support Senate Bill 1239 as this proposed law may be beneficial
not only to society but also to firms themselves; thus it is a quid
pro quo relationship. However, it must be taken into account
that there is a curvilinear relationship (inverse U-shape).
Therefore, there is an optimal level of giving as it increases at a
decreasing rate. Anything exceeding the optimal level will
already decrease firm performance.
In relation to the interaction of corporate philanthropy
and advertising, the study leans towards the firms being wary of
the use of advertising. This supports hypothesis III. B that the
type and level of advertising can matter to the stakeholders,
especially when firms already have a negative preexisting image
or reputation. We recommend firms to be cautious by looking
into effective advertising strategies; since on its own,
philanthropy already has a positive effect on firm performance.
Coupling it with advertising can be a risk by either enhancing or
dampening the effect on firm performance. Pomering and
Johnson (2009) suggest that effective strategies, especially for
firms that have a negative image, should consistently capitalize
their philanthropy on societal issues that is common to the firm
and stakeholders. The right level of advertising is also an
effective advertising strategy for stakeholders to veer away from
skepticism, as a high level of advertising philanthropy may spoil
the altruistic image of firms. Stakeholders become skeptic, in the
sense that they begin to think that it is manufactured advertising.
Due to increased exposure to advertising material, today’s
stakeholders have learned to read between the lines, so a good
mix of the type and level of advertising are deemed to be most
effective (Elving, 2010; Pomering and Johnson).
Recommendation for Further Studies
Much remains to be learned about corporate
philanthropy on firm performance. Given that this study is the
first to investigate the relationship between corporate social
performance and corporate financial performance in the
Philippines, it would be remiss if we do not emphasize better
sources of data, especially the development of an index that is
capable of broadly measuring the CSR performance of a firm
beyond charitable giving, which will aid in the investigation of
the CSR-firm performance relationship. This is because CSR has
many dimensions and our paper only focuses on one of the
dimensions: corporate giving. Therefore, a more comprehensive
index that tracks the CSR performance of firms can deepen the
implications of future studies on this topic. Lastly, our dataset
uses the years 2008 to 2012. A longer time period that tracks
changes in the key variables may provide more accurate results
as literature suggests CSR has a long – term effect.
7.
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APPENDICES
Industry Dummy Variables
Industry
Description
𝑰𝟏
I takes the value of 1 if the firm is from the mining, quarrying, and gas extractions industry,
otherwise it is 0.
𝑰𝟐
I takes the value of 1 if the firm is from the utilities industry, otherwise it is 0.
𝑰𝟑
I takes the value of 1 if the firm is from the construction industry, otherwise it is 0.
𝑰𝟒
I takes the value of 1 if the firm is from the manufacturing industry, otherwise it is 0.
𝑰𝟓
I takes the value of 1 if the firm is from the wholesale trade industry, otherwise it is 0.
𝑰𝟔
I takes the value of 1 if the firm is from retail trade industry, otherwise it is 0.
Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
28 𝑰𝟕
I takes the value of 1 if the firm is from the transportation and warehousing industry, otherwise it is
0.
𝑰𝟖
I takes the value of 1 if the firm is from the information industry, otherwise 0.
𝑰𝟗
I takes the value of 1 if the firm is from the real estate and rental and leasing industry, otherwise it
is 0.
𝑰𝟏𝟎
I takes the value of 1 if the firm is from the professional and scientific and technical services
industry, otherwise it is 0.
𝑰𝟏𝟏
I takes the value of 1 if the firm is from the educational services industry, otherwise it is 0.
𝑰𝟏𝟐
I takes the value of 1 if the firm is from the arts, entertainment and recreation industry, otherwise it
is 0.
𝑰𝟏𝟑
I takes the value of 1 if the firm is from the accommodation and services industry, otherwise it is 0.
𝑰𝟏𝟒
I takes the value of 1 if the firm is from the administrative and support and waste management and
remediation services industry, otherwise it is 0.
Key Variables
Key Variable
Definition
Formula
GIVING
GIVING captures the level of
corporate philanthropy of the firm. It
is ratio of charitable contributions
expense of year i at year t to sales of
firm i at year t. Accounts that are
named as Charitable Contributions
Expense or CSR Expense are
considered to be as Giving.
Charitable Contributions Expense
Sales
ADVERTISING
ADVERTISING captures advertising
intensity, which represents consumer
awareness. It is the ratio of the
advertising expenditures of firm i for
year t to the sales of firm i for year t.
Advertising Expenditures
Sales
DYNAMISM
DYNAMISM captures the
environmental dynamism of each
industry. It is the ratio of the standard
error of the regression coefficient
related to the time dummy variable to
the average industry sales.
Standard Error
Average Industry Sales
29 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
GIVING 2 captures the inverted U –
GIVING
2
GIVINGxDYNAMISM
shaped relationship of the firm
performance and corporate giving
relationship. It is the first derivative of
the firm performance measures with
respect to the variable GIVING.
GIVINGxDYNAMISM is the
interaction variable between corporate
giving and firm performance.
GIVING 2 xDYNAMISM is the
GIVING 2 xDYNAMISM
GIVINGxADVERTISING
interaction variable between the first
derivative of firm performance with
respect to corporate giving and the
variable GIVING.
GIVINGxADVERTISING is the
interaction variable between the
variable GIVING and ADVERTISING.
GIVING 2 xADVERTISING is the
GIVING 2 xADVERTISING
interaction variable between the first
derivative of firm performance with
respect to corporate giving and the
variable ADVERTISING.
∂ 2 Firm Performance
∂(GIVING)2
Charitable Contributions Expense
x
Sales
Standard Error
Average Industry Sales
∂ 2 Firm Performance
x
∂(GIVING)2
Standard Error
Average Industry Sales
Charitable Contributions Expense
x
Sales
Advertising Expenditures
Sales
∂ 2 PERFORMANCE
x
∂(GIVING)2
Advertising Expenditures
Sales
Summary of A priori Expectations and Justifications
Variable
A – Priori
Justification
GIVING
+
Corporate philanthropy can create positive moral capital, which
can generate insurance – like protection, thereby creating
shareholder wealth (Godfrey, 2005).
ADVERTISING
+
McWilliams and Siegel (2000) submit that advertising can
improve firm performance through product differentiation.
DYNAMISM
-
GIVING 2
-
A highly dynamic environment can hinder a firm from acquiring
its necessary resources (Wang et al., 2008). A highly dynamic
environment can therefore decrease firm performance.
It is argued that the relationship between corporate giving and
firm performance can be nonlinear (Brammer and Millington,
2008). Wang et al. (2008) further posit that the relationship is of
30 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
an inverse U – shape.
GIVINGxDYNAMISM
+
Dynamism can enhance the effect of corporate giving on firm
performance (Wang et al., 2008).
+/-
Consumer awareness, as represented by advertising intensity can
enhance or dampen the effect of corporate philanthropy on firm
performance (Servaes and Tamayo, 2013; Pomering and
Johnson, 2009).
LEVERAGE
-
Leverage can affect firm performance through agency costs
(Jensen, 1986). Firms that are profitable and have less debt are
more willing to engage in corporate social responsibility
activities (Brammer and Millington, 2008).
SIZE
+
Servaes and Tamayo (2013) argue that larger firms have more
investment opportunities. The size of the firm also determines
whether the firm will engage in CS activities (Tsoutsoura, 2004).
AGE
+
In view of corporate philanthropy, newer firms tend to disregard
philanthropic efforts as they focus more on product development
(Brammer and Millington, 2008).
RESEARCH
+
Research and Development can positively affect profits through
innovation (Warusawitharana, 2008).
2
GIVING xDYNAMISM
GIVINGxADVERTISING
GIVING 2 xADVERTISING
Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
31 Effect of Corporate Philanthropy on Firm Performance De La Salle University
Bustos, J. Durano, J. Severino, S. Somera, P.
32