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Too Little or Too Much? Untangling the Relationship Between Corporate Philanthropy and Firm Financial Performance

Department of Management of Organizations, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
Department of Management of Organizations, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
Department of Management of Organizations, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
mnheli{at}ust.hk
mnjaepil{at}ust.hk
mnjtli{at}ust.hk

What is the relationship between corporate philanthropy and corporate financial performance? Some scholars argue that corporate philanthropy facilitates stakeholder cooperation and helps secure access to critical resources controlled by those stakeholders, suggesting that corporate philanthropy should be positively associated with corporate financial performance. In contrast, other scholars take a negative stance, suggesting that corporate philanthropy diverts valuable corporate resources and tends to inhibit corporate financial performance. Existing empirical studies have not found conclusive evidence on the corporate philanthropy–financial performance relationship. Integrating and extending existing perspectives, this study develops the argument that the relationship between corporate philanthropy and financial performance is best captured by an inverse U-shape. In addition, it posits that the inverse U-shaped relationship varies with the level of dynamism in firms' operational environment. Using a panel data set of 817 firms listed in the Taft Corporate Giving Directory from 1987 to 1999, we find strong support for these arguments.

Key Words: corporate philanthropy; corporate financial performance; environmental dynamism