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Shareholder Taxes and Corporate Philanthropy
Dhammika Dharmapala, University of Connecticut & University of Michigan
Sanjay Gupta, Michigan State University
ABSTRACT. Two theoretical frameworks, involving profit maximization and managers’ perquisite consumption, have been used in the literature on corporate philanthropy. This paper formulates and tests an alternative framework that views corporate donations as a form of (potentially tax-advantaged) payout to shareholders. It derives the hypothesis that corporations’ contributions depend in part on the tax price of these donations to their shareholders. This hypothesis is tested using firm-level data on corporate donations over 1992-2001 and exogenous variation in the relative tax price of corporate donations created by tax reforms. Employing a differences-in-differences approach, we find corporate contributions are decreasing in the tax price for firms with predominantly individual ownership, while the tax price has no effect on contributions by firms with predominantly institutional ownership. Further this difference is not attributable to differences in governance characterisitics.
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