Corporate Charitable Contributions: A Corporate Social Performance or Legitimacy Strategy?

Corporate Charitable Contributions:

A Corporate Social Performance

or Legitimacy Strategy?

Jennifer C. ChenDennis M. PattenRobin W. Roberts

ABSTRACT. This study examines the relation between

firms’ corporate philanthropic giving and their perfor-

mance in three other social domains – employee relations,

environmental issues, and product safety. Based on a

sample of 384 U.S. companies and using data pooled from

1998 through 2000, we find that worse performers in the

other social areas are both more likely to make charitable

contributions and that the extent of their giving is larger

than for better performers. Analyses of each separate area

of social performance, however, indicate that the relation

between giving and negative social performance (cited

concerns) only holds for the environmental issues and

product safety areas. We find no significant association

between corporate philanthropy and employee relations

concerns. In general, these findings suggest that corporate

philanthropy may be more a tool of legitimization than a

measure of corporate social responsibility.

KEY WORDS: corporate charitable contribution, cor-

porate social performance, legitimization, social reporting

Introduction

Since at least as far back as the compilation of social

disclosures by the accounting firm Ernst and Ernst in

the 1970s (Ernst and Ernst, 1976 et seq.), charitable

contributions have been identified as a measure of

positive corporate social performance. While today’s

sustainability reporting guidelines (see, e.g., Global

Reporting Initiative, 2006) do not specifically suggest

that philanthropic giving be reported, Erusalimsky

et al. (2006, p. 17) note that ‘‘charitable contributions

were significantly the most emphasized’’ economic-

related item found in their analysis of corporate social

responsibility reports. If the reports were as forth-

coming with information regarding the negative

impacts of the businesses, the highlighting of the

corporate giving might be less troubling. Unfortu-

nately, Gray and Bebbington (2007) argue that in-

stead, most companies’ social reports appear to be

more about spinning a positive image than providing a

balanced accounting of the firms’ social impacts.

The overt bias of most current corporate social

reports aside,we are willing to concede that if corporate

philanthropic efforts truly are, as modeled by Carroll

(1979, 1991), discretionary actions above and beyond

the economic, legal, and ethical requirements of busi-

ness, their inclusion as a means of highlighting positive

social impacts may be less objectionable. Our concern,

however, is that rather than being a purely altruistic

sharing of discretionary resources with society, corpo-

rate philanthropy may instead be being used as a means

for companies to mitigate exposures to their social

legitimacy brought about by poor performance inother

social domains. If this latter view holds true, it would

suggest that a meaningful evaluation of the positive

social impacts of corporate giving could only be made

in conjunction with the availability of an unbiased

social reporting of the other performance areas. The

purpose of this study was to empirically analyze whe-

ther corporate charitable contributions are better

understood as an indicator of corporate social perfor-

mance, or as an act of corporate legitimization. We

begin our examination by outlining the theoretical

constructs underlying the alternative interpretations of

the role of corporate philanthropy.

Conceptual development

Philanthropy as a form of corporate social performance

Numerous studies (see, e.g., Wartick and Cochran,

1985; Wood, 1991; Swanson, 1995) utilize Carroll’s

Journal of Business Ethics (2008) 82:131–144 � Springer 2007DOI 10.1007/s10551-007-9567-1

(1979) conceptual model of corporate social per-

formance as a foundation for their corporate social

responsibility and performance research. According

to Carroll (1979), corporate social performance in-

volves three components: (1) the identification of

the domains of an organization’s social responsibility;

(2) the development of processes to evaluate stake-

holder demands; and (3) the implementation of

programs to manage social issues.

The first component, business social responsibility

identification, is necessary because different respon-

sibilities may be evaluated by different stakeholder

groups in different ways and trigger dissimilar man-

agement actions. For instance, shareholders may be

most interested in the financial returns on their

investments. As such, in order to meet shareholders’

expectations, corporate managers may choose to

reduce direct labor cost by outsourcing part or all of

their assembling work overseas. On the other hand,

the intentional layoff of domestic laborers may not

be considered an ethical management practice for

other stakeholder groups, especially for employees

and their families. Thus, if corporate managers

consider more than just their financial responsibili-

ties, outsourcing may not be the best choice.

Accordingly, Carroll (1979) divides business social

responsibility into four categories: economic, legal,

ethical, and discretionary responsibilities.

Economic responsibilities

The first and foremost social responsibility of busi-

ness is economic in nature. Firms must produce

goods and services that society wants and needs.

Unless businesses fulfill their economic function,

they will neither have the resources to perform other

roles nor will they survive long enough to be an

agent for any form of societal change. A similar

notion has been forwarded by Bakan (2004) and

Friedman (1962).

Legal responsibilities

Society grants business institutions have the right to

pursue their economic goals, but explicitly requires

companies to fulfill these goals within the framework

of legal requirements. However, the line between

the economic and the legal responsibilities of busi-

ness cannot be easily drawn. For instance, product

safety and the ramifications of production processes

on the health of employees would each be

considered as matters of both economic and legal

responsibility.

Ethical responsibilities

Though less well defined, society also has expecta-

tions for companies over and above legal require-

ments. Ethical responsibilities require corporations

to engage in business practices in a manner consis-

tent with societal values in such matters as fair

employment and the environmental impact of pro-

duction. Workforce reduction, for instance, is a

legally acceptable business practice yet it could be

ethically controversial (Cascio et al., 1997).

Discretionary responsibilities

Finally, discretionary responsibilities are socially

desirable actions taken by business entities that are

beyond their economic, legal, and ethical obliga-

tions. Carroll (1979) specifically includes in this

classification activities such as philanthropy and

community leadership. He defines these activities as

discretionary because businesses may choose, or have

discretion over the type, timing, and extent of their

involvement.

Carroll (1979) emphasizes that while any given

business action can embody economic, legal, ethical,

or discretionary motives, most can be categorized as

primarily relating to one of the four. Further,

whereas all of these business responsibilities may be

simultaneously expected in today’s business envi-

ronment, Carroll (1979) asserts that companies his-

torically placed an initial emphasis on the economic,

then added legal responsibilities, and later showed a

concern for their ethical and discretionary respon-

sibilities.

Two studies investigate how managers prioritize

their limited resources to fulfill the economic, legal,

ethical, and discretionary expectations placed on

their organizations. First, Aupperle et al. (1985)

surveyed 241 corporate executives to test the relative

values or weights of each of the four components of

Carroll’s (1979) framework. The relative degrees of

importance the executives placed on each compo-

nent were: economic = 3.5, legal = 2.54, ethi-

cal = 2.22, and discretionary = 1.30. The empirical

results also suggested that the more concerned a firm

was with its economic responsibilities, the less

interest it had in its ethical and discretionary

responsibilities. Similarly, Ruf et al. (1993) applied

132 J. C. Chen et al.

an analytic hierarchy process to determine the rela-

tive importance of corporate social performance, and

their prioritization results were consistent with those

of Aupperle et al. (1985). Thus, among the four

types of responsibilities, discretionary responsibilities

appear to be consistently weighted as least important.

The conceptualization of corporate philanthropy

as a discretionary activity and the evidence suggest-

ing managers see it as such suggest that companies

facing concerns along economic, legal, or ethical

dimensions would be expected, on average, to

allocate their discretionary resources toward

addressing these concerns before making charitable

contributions. Philanthropy would then truly be, as

Carroll (1991, p. 42) states, the ‘‘icing on the cake’’

and would indeed reflect positive social perfor-

mance. As such, its inclusion as a measure of cor-

porate social responsibility would be appropriate.

Philanthropy as an act of legitimization

Legitimacy theory suggests an alternative view of

charitable contributions. In general, this theory at-

tempts to explain how organizations endure in a

changing society, and more specifically it suggests

that financial performance and efficiency may be

necessary, but not sufficient conditions for organi-

zations to reach the objective of survival. According

to the tenets of legitimacy theory, the continued

existence and development of any social institution,

and business is no exception, is conditioned upon its

social legitimacy (Shocker and Sethi, 1974). Orga-

nizations are perceived to be legitimate when their

goals, methods of operation, and outcomes are

congruent with the expectations of those who

confer legitimacy (Lindblom, 1994). The differences

between corporate managers’ perception of their

legitimacy status and the expectations of those who

confer it are called ‘‘legitimacy gaps’’ (Sethi, 1979).

Wartick and Mahon (1994) note that legitimacy

gaps may arise for several reasons. First, corporate

performance can change while societal expectations

of corporate performance remain the same or soci-

etal expectations of corporate performance can

change while actual corporate performance remains

the same. In either of these situations, what was once

an acceptable corporate practice becomes problem-

atic. Second, both corporate performance and

societal expectations may change, but they either

move in different directions, or they move in the

same direction but with a time lag. Empirical evi-

dence suggests the legitimacy of an organization or

its industry can be threatened by particular external

or internal adverse social events (Patten, 1992; De-

egan et al., 2000).

Neu et al. (1998, p. 265) argue that firms are

expanding efforts to manage their legitimacy (that is,

close legitimacy gaps) because it ‘‘helps to ensure the

continued inflow of capital, labor and customers

necessary for viability... it also forestalls regulatory

activities by the state that might occur in the absence

of legitimacy... and pre-empts product boycotts or

other disruptive actions by external parties....’’ How

organizations manage their legitimacy has been, and

continues to be, an interest of academic pursuit (see

e.g., Meyer and Rowan, 1977; DiMaggio and

Powell, 1983; Ashforth and Gibbs, 1990; Lindblom,

1994; Suchman, 1995).

Dowling and Pfeffer (1975) suggest that organi-

zations can close legitimacy gaps by (1) modifying

their goals, methods of operation, and performance

to be in conformity with the prevailing definitions of

legitimacy, (2) attempting to alter the definitions of

social legitimacy to the extent that social expectation

becomes congruent with the current practices of the

organization, and/or (3) making an effort to identify

or associate themselves with symbols, values, or

institutions that have a strong perceived image of

social legitimacy. Meyer and Rowan (1977) more

pointedly assert that instead of making substantive

changes, organizations might choose a strategy of

ceremonial conformity. That is, organizations can

adopt certain highly visible and relevant practices

that are consistent with social expectations while

leaving the essential operations of the organization

intact. In support of such an argument, both Patten

(2002) and Cho and Patten (2007) provide evidence,

for example, that firms with poorer environmental

performance tend to make more extensive positive

or mitigating environmental disclosures in their

financial reports than companies with better envi-

ronmental performance, apparently in an effort to

off-set the legitimacy threats posed by their weaker

records.

Both Ashforth and Gibbs (1990) and Dowling and

Pfeffer (1975), among others, argue that corporate

philanthropy might also be used as a tool of

Corporate Charitable Contributions 133

legitimization. That is, firms may make charitable

contributions to project an image of positive social

performance in an effort to mitigate or off-set poor

social performance in other areas. Williams and

Barrett (2000), for instance, examine the influence of

corporate charitable giving programs on the link

between the number of EPA and OSHA violations

committed by a firm and its public image. The results

indicate that although a firm’s public image can be

diminished through its violation of environmental

and labor regulations, the extent of the decline in

public image is reduced through charitable giving.

Charitable contributions appear to offer corpora-

tions a partial remedy for repairing their legitimacy.

Thus, in contrast with the corporate social respon-

sibilities perspective (Carroll, 1979, 1991), rather

than directing resources toward correcting poor so-

cial performance in other domains, business entities

might instead increase their charitable contributions

in an effort to manage their legitimacy status. If,

indeed, companies do use philanthropic giving as a

tool for addressing legitimacy concerns, its inter-

pretation as a measure of positive social performance,

without disclosure of performance in other social

areas, would seem inappropriate.

The primary intent of our investigation is to

provide evidence on the extent to which corporate

philanthropic giving is related to social performance

in other areas. Rehbein et al. (2004) report that in

addition to large firms, companies that have prob-

lems with employee relations, environmental per-

formance, and/or product safety issues are more

likely to be targeted for operational improvement by

shareholder activists. As such, in this study we spe-

cifically examine the relation between social per-

formance in these three areas and both firms’

propensity to make corporate charitable contribu-

tions and the extent of that giving.

The arguments laid out above suggest two sets of

competing hypotheses. First, if corporations view

philanthropy as a discretionary action as outlined in

Carroll’s (1979) social responsibility scheme, we would

expect that social performance relative to employee

relations, environmental issues, and product safety

would be positively related. That is, firms with

problems in these social performance areas would be

expected to direct excess resources toward addressing

the concerns rather than using them for charitable

giving. This leads to the following hypotheses:

H1a: Firms with worse social performance are less

likely to make donations than firms with better

social performance.H1b: The extent of corporate charitable giving will

be lower for firms with worse social perfor-

mance than for firms with better social per-

formance.

In contrast, if companies use philanthropy as a

legitimization tool, firms with poor social perfor-

mance in other areas would be expected to make

charitable contributions in an effort to offset those

negative impacts on their legitimacy. This suggests

the following competing hypotheses:

H2a: Firms with worse social performance are

more likely to make donations than firms with

better social performance.H2b: The extent of corporate charitable giving will

be higher for firms with worse social perfor-

mance than for firms with better social per-

formance.

Research methods

Sample selection and description

Corporations selected for examination in this study

had to meet three criteria: (1) they had to be in-

cluded in the Kinder, Lydenberg, Domini, Inc.

ratings of corporate social performance (discussed

below) over the period from 1998 through 2000; (2)

they had to be listed on the Corporate Giving Directory

and/or the Directory of Corporate and Foundation

Givers over the period from 1998 through 2000, and

(3) they had to have Compustat data available for the

period. In total, 384 firms met all three criteria

resulting in a longitudinal cross-sectional (panel) data

set of 1152 observations.1

Corporate philanthropic giving

We used the Corporate Giving Directory (2003), the

Directory of Corporate and Foundation Givers

(2000), and tax returns of private foundations (990-

PF) to identify first, the years in which each of our

sample firms reported charitable contributions (over

the period from 1998 through 2000) and second, the


extent of the philanthropy. Our giving measure in-

cludes both cash gifts (including direct giving and

donations to corporate sponsored foundations) and

gifts in-kind (where applicable). Descriptive statistics

on the extent of giving by our sample firms is included

in Table I. Table II reports Pearson product-moment

correlations for the giving measure and other variables

used in our analyses (discussed below).2

Social performance measures

Corporate social performance information was

obtained from the social research firm Kinder,

Lydenberg, Domini’s (KLD) Socrates database.3

Although several other corporate social performance

reports are available, either the number of companies

or the dimensions of corporate social performance

covered by alternative sources are limited. On the

other hand, KLD data offer several desirable qualities.

KLD has quantifiable social records of over 3,000

publicly traded U.S. companies across a range of

dimensions pertaining to business related social per-

formance concerns. Moreover, KLD’s data have been

used extensively in a growing body of largely man-

agement-based U.S. research on corporate social

performance issues (e.g., Waddock and Graves,

1997a, b; Griffin and Mahon, 1997; Agle et al., 1999;

Berman et al., 1999; Greening and Turban, 2000;

Hillman and Keim, 2001; Ruf et al., 2001; Waddock,

2003; Rehbein et al., 2004), and have also recently

been applied in accounting research (e.g., Cho and

Patten, 2007). Most importantly, these data have been

validated as the best currently available measurements

TABLE I

Descriptive statistics for variables used in charitable contribution empirical tests (n = 1,152)

Variable Min Max Mean Standard deviation

CharCont 0.00a 624.61 10.88 38.83

EmpRel 0 3 0.28 0.51

Env 0 5 0.46 0.89

ProdSaf 0 4 0.46 0.78

IndClass n/a n/a n/a n/a

Size (lnAssets) 3.55 13.71 8.71 1.60

ROA )39.05 49.85 5.83 6.26

Age 1 209 62.09 43.51

aFigures are in millions except for age.

TABLE II

Pearson product-moment correlation coefficients

1 2 3 4 5 6 7 8

1. CharCont

2. EmpRel )0.01

3. Env 0.12** 0.10**

4. ProdSaf 0.34** 0.15** 0.30**

5. IndClass 0.26** )0.02 0.01 0.24**

6. Size 0.30** 0.03 0.24* 0.37** 0.42**

7. ROA 0.17** )0.11** )0.11** )0.01 0.11** )0.21**

8. Age 0.10** )0.03 0.10** 0.07* 0.07* 0.02 0.09**

*Correlation is significant at the 0.05 level (2-tailed).

**Correlation is significant at the 0.01 level (2-tailed).


of corporate social performance (Sharfman, 1996;

Szwajkowski and Figlewicz, 1999). A complete and

detailed description of the KLD rating system is

available from Waddock and Graves (1997a, b) and

KLD’s website (http://www.kld.com).

The KLD separately assigns strengths and con-

cerns across eight social performance dimensions.

These dimensions are community, corporate gov-

ernance, diversity, employee relations, environment,

human rights, product, and others (KLD, 2003).

Among these different dimensions, three measure-

ments (employee relations, environment, and prod-

uct safety) are relevant to the current study.

Employee relations

The KLD analyzes corporate employee relations’

strengths and concerns based on an extensive eval-

uation of each company’s union relations, labor

policy, employee benefit, employee involvement,

and compliance with labor related regulations. High

strength ratings are assigned to companies that (1)

have a strong history of union relations; (2) have cash

profit distributions or stock options available to the

majority of their employees; and/or (3) have a strong

retirement benefit program. On the other hand,

high concern ratings are given to firms that (1) have

a poor history of union relations; (2) have records of

employee health and safety standards violations; (3)

have reduced their workforce by 15% in the most

recent year or by 25% during the past 2 years or have

made an announcement of such a planned reduction;

and (4) have either underfunded pension programs

or inadequate retirement benefits.

Environment performance

The KLD assesses corporate environmental perfor-

mance strengths and concerns based on the follow-

ing criteria. Firms are given high strength ratings

when they have excellent environmental planning,

employ environmental impact minimizing proce-

dures, or where they have taken the initiative to use

environmental-friendly natural resources. In con-

trast, high concern ratings are assigned to companies

that have poor environmental law and regulations’

compliance records, that generate a significant por-

tion of their revenues from products or services that

have negative environmental consequences, or have

failed to keep up with industry-wide environmental

preventive standards.

Product safety

Firms are given product strength ratings when they

have nationally recognized quality programs or have

provided products or services for the economically

disadvantaged, or they are industry leaders for

research and development. Conversely, companies

are assigned high product concern ratings when they

have recently been involved in controversies or

regulatory actions pertaining to the safety of their

products and services, or when they have been

subject to accusations of negative advertising prac-

tices, consumer fraud, or antitrust actions.

The KLD assigns a score of zero, one, or two for

each of the strength and concern areas. Since this

study focuses on philanthropic behavior where firms

have problems with employee relations, product

safety, and/or environmental performance, only the

concern ratings (separately for each of the three

areas) are used in our analysis. This is consistent with

both Cho et al. (2006) and Cho and Patten (2007).

Table I summarizes descriptive statistics for the social

performance measures.

Tests on the proportion of contributing firms

We begin our analysis by examining whether the

propensity to make a donation in a given year is

associated with having been cited for concerns in

other social areas. According to Carroll’s (1979)

hierarchical model of social responsibility, if phi-

lanthropy is indeed a residual act of social perfor-

mance, companies facing other social performance

concerns should be less likely to make charitable

contributions than companies without such prob-

lems. In contrast, legitimacy theory supports the

claim that companies with other social performance

concerns might attempt to mitigate these problems

by making donations and as such, suggests the pro-

portion of contributing firms will be higher for the

group with other concerns than for those with no

problems. As noted in Table III, 612 of the 1,152

firm-year observations included at least one social

performance concern citation. As also noted in the

table, 85.1% of these observations (521 firms) were

associated with corporate giving in the period. In

contrast, in periods with no other social performance

concerns, only 75.6% of the companies made char-

itable contributions. A chi-squared test indicates the


difference in these proportions is statistically signif-

icant (at p < .01, two-tailed). This evidence thus

supports the legitimacy view.

Table IV presents the results of an analysis of the

proportion of givers where social performance con-

cerns are classified separately. Panels A, B, and C of

the table summarize results based on employee rela-

tions, environmental, and product safety concerns,

respectively. Whereas the proportion of companies

making a donation in years cited for employee rela-

tions concerns (81.0%) is virtually identical to the

proportion of givers in years without concerns

(80.5%), there is a substantial difference in propor-

tions for firm-years with concerns versus those

without across the other two social domains. Over

96% of sample firms made charitable contributions in

years where they were cited for environmental con-

cerns in contrast to only 75.2% of the years without a

noted concern in the area. Similarly, the percentage of

companies making donations in years where they

were cited for product safety issues (87.6%) is higher

than in years where they weren’t (77.5%). The dif-

ferences in proportions are statistically significant (at

p < .01 or better, two-tailed) for both the environ-

mental and product safety concern areas.

Tests on the extent of philanthropic giving

We next examine whether differences in the extent of

social performance concerns in other areas are asso-

ciated with differences in the extent of company

charitable contributions. While some prior studies of

corporate charitable giving focus on the total dollar

value of the philanthropy (e.g., Seifert et al., 2003;

Useem, 1988), others (e.g., Griffin and Mahon, 1997;

Navarro, 1988) use a size-adjusted measure. As noted

by both Griffin and Mahon (1997) and Hempel and

Gard (2004), the size-adjusted giving can be inter-

preted as a measure of firm generosity. Accordingly,

we separately estimate models using the total contri-

butions and the size-adjusted giving as our extent of

philanthropy measure. We compute the size-adjusted

measure as the amount of giving by the company each

year divided by the firm’s total assets as reported in the

same period.4

Findings of prior studies suggest that both cor-

porate social performance and corporate charitable

giving may be influenced by a variety of other fac-

tors. In order to control for these potentially con-

founding influences, we estimate a multiple

regression model including variables controlling for

industry classification, company size, profitability,

and company age in our analysis. Each of these

control variables is discussed in more detail below.

Industry classification

Prior studies have found systematic relations be-

tween broad industry characteristics and corporate

social responsibility activities and contributions. That

is, industry differences have been shown to be sig-

nificantly related to a company’s social responsibility

practices. Roberts (1992), for example, found that

firms in industries with a high level of political risk

and concentrated intense competition make higher

levels of social responsibility disclosures.

TABLE III

Comparison of proportion of firms making or not making contributions, partitioned on whether the firm was cited

for a social performance concern in any of the three social areas in the year of observation

No. of firms Percent

Companies with a concern noted for the year (n = 612)

Making a contribution 521 85.1

Not making a contribution 91 14.9

Companies with no concern noted for the year (n = 540)



Chi-squared statistic 16.89

Significancea p < .01

aSignificance level is two-tailed.


Three industry factors are potentially relevant to

the current investigation. First, environmentally

sensitive firms are more likely to have environmental

issues than service-oriented companies. Second,

product safety concerns are more relevant to man-

ufacturing corporations than to merchandising or

servicing firms. Finally, as regards to charitable

contributions, prior studies suggest that firms in

industries that rely more on consumer sales (Burt,

1983), public perceptions (Clotfelter, 1985), or are

more labor intensive (Navarro, 1988) tend to donate

more. Accordingly, we use a one/zero indicator

variable, IndClass, to control for firms exhibiting a

potential industry issue. In other words, if a sample

firm is identified with one of the above three

industry factors, the variable is set equal to one;

otherwise, it is zero. We anticipate a positive relation

between IndClass and corporate charitable giving.

Company size

McElroy and Siegfried (1985) present evidence

suggesting company size correlates with the extent of

total charitable contributions. Firm size creates social

and political exposures (Watts and Zimmerman,

1986; Miles, 1987), and as a result, larger firms have

a higher level of visibility to the general public and

the government as well as to grant-seeking organi-

zations. In addition, larger firms are also more likely

to institutionalize their charitable giving programs

via corporate sponsored foundations (Webb, 1992;

Werbel and Carter, 2002). Both McElroy and

Siegfried (1985) and Useem (1988) provide evidence

TABLE IV

Comparison of proportion of firms making or not making contributions, partitioned on whether the firm was cited

for specific social performance concerns in the year of observation

No. of firms Percent

Panel A – Employee relations




Companies with no concern noted for the year (n = 858):





Panel B – Environmental issues









Panel C – Product safety









aSignificance levels are two-tailed.


suggesting company size correlates with the total

dollar value of corporate giving. However, the lit-

erature is silent on any expected relations between

firm size and the generosity of the giving. In this

study, we use the natural log of assets to control for

potential firm size effects. A positive association with

the extent of giving is hypothesized.

Profitability

Webb (1994) argues that charitable giving is related

to profits because firms time their donations as a

means to reduce taxable income. Further, McElroy

and Siegfried (1986) suggest that many firms use a

fixed percentage of pretax net income to decide the

amount of their donations. Accordingly, we use

return on assets of each of the observed year to

control for the potential effect of profitability on the

amount of charitable contributions. We again expect

a positive association with giving.

Company age

Consistent with Roberts (1992), the maturity of a

firm may affect its social responsibility activities

because as a firm matures, its reputation and history

of involvement with nonprofit and charitable orga-

nizations can become entrenched. For instance, the

Ford Motor Foundation has a history of supporting

museums and arts. Older corporations are thus as-

sumed to be more likely to have long-term spon-

sorships with nonprofit organizations and charities

resulting in larger levels of giving, on average, than

younger firms. The age of each corporation in 2000

is thus included as a final control variable. A positive

association with the extent of giving is expected.

In order to examine the relation between the

extent of social performance concerns and the extent

of corporate philanthropy we estimate the following

multiple regression model:5

CharContit

¼ a1 þ b1(ConScrit)þ b2(IndClassit)

þ b3(Sizeit)þ b4(ROAit)þ b5(Ageit)

where

CharContit = alternately, the charitable contribu-

tions by firm i in period t, and the size-adjusted

charitable contributions by firm i in period t,

ConScrit = the sum of the KLD employee rela-

tions, environmental, and product safety concern

scores for firm i in period t,

IndClassit = the industry classification for firm i

in period t,

Sizeit = the natural log of assets for firm i in

period t,

ROAit = the return on assets for firm i in period t,

Ageit = the age of firm i at period t.

A significant negative relation between the ConScr

variable and the extent of charitable giving (Char-

Cont) would be evidence in support of Carroll’s

(1979) discretionary resource view of philanthropy,

whereas a significant positive association would

support the legitimacy view.

Table V presents the results of our regression anal-

yses where social performance is measured as the total

KLD concern scores. Panel A summarizes the results

using total (unadjusted) contributions as the dependent

variable, whereas Panel B presents the results for the

model using the adjusted contribution measure.

Overall, both models are highly significant (based on

model F statistics). The adjusted coefficient of deter-

mination (adjusted-R2) is slightly higher for the total

contributions model than for its adjusted giving

counterpoint (0. 204 vs. 0.132). Both the IndClass and

ROA control variables are positively associated with

the giving measures, and both are highly significant.

Age, although possessing the expected positive sign, is

significant at only the p = .072 level, two-tailed in the

total giving model. It is, however, highly significant

(p < .001, two-tailed) in the adjusted giving analysis.

Interestingly, the Size variable is positive and highly

significant for the total giving model but negative and

highly significant for the adjusted giving regression.6

Most importantly, the total concern score variable

(ConScr) possesses a positive sign and is also highly

significant in each of the models (at p < .001, two-

tailed). This indicates that, controlling for other po-

tential influences, firms with worse social performance

tend to donate more and are more generous in their

giving than firms with better performance in other

social areas. Thus, consistent with the findings of the

proportion of givers tests reported above, this evidence

supports the legitimacy view of giving.

In the final stage of our examination, we replace the

ConScr (total concern score) variable with separate


score measures for each of the three areas of social

performance concern. The results of these additional

regression analyses, presented in Table VI, indicate

that both environmental concern scores and product

safety concern scores are positively and significantly

associated with differences in charitable giving (both

raw and adjusted amounts). In contrast, the employee

relations score is negatively signed and is statistically

insignificant. These results are again consistent with

the findings of our tests examining the relation be-

tween the proportion of contributors and individual

areas of social performance concern.7

Discussion

The objective of this study was to empirically test

whether corporate charitable contributions are better

understood as an indicator of corporate social per-

formance as theorized by Carroll (1979, 1991) and

Wood (1991), or as corporate legitimization actions

as theorized by Dowling and Pfeffer (1975). In this

study, both the finding that a larger percentage of

firms cited as having social performance concerns

make donations than the percentage of firms without

noted problems and the finding that differences in

the extent of corporate charitable giving are posi-

tively associated with the extent of social perfor-

mance concern scores support the legitimacy

argument. However, the results are inconsistent

across specific areas of social performance concern.

Whereas poorer performance in the environmental

and product safety areas appears to be related to both

the propensity to make donations and the extent of

that giving, cited concerns with employee relations

is not significantly associated with either giving

TABLE V

Regression results for models using total concern scores

Expected sign Parameter estimatesa Standard error Sig.b

Panel A – Total (unadjusted) charitable giving

Control vars.

IndClass + 8.131 2.326 0.006

Size + 5.002 0.772 0.000

ROA + 1.260 0.172 0.000

Age + 0.043 0.024 0.072

Test vars.

ConScr +/) 5.295 0.686 0.000

Model statistics

Model F-statistic = 60.011

Sig. Sig. at the 0.000 level

R-squared Adjusted R2 = 0.204

Panel B – Size-adjusted giving

Control vars.

IndClass + 729.2 118.32 0.000

Size +/) )217.5 39.29 0.000

ROA + 51.5 8.73 0.000

Age + 5.6 1.21 0.000

Test vars.

ConScr +/) 213.4 34.89 0.000

Model statistics




aReported at 10)6.bSignificance levels are two-tailed.


metric. One possible explanation for this anomalous

finding is that employee relations may be considered

by management as an internal factor rather than an

external issue such as environmental performance

and product safety evaluation. If corporate charitable

contributions are generally viewed as a channel be-

tween the corporation and external parties, they may

not be seen as an appropriate instrument for man-

aging internal issues including employee relations.

In general, the results of our study suggest that, on

average, charitable contributions appear to be used

by corporations as a tool of legitimization. The

finding that this giving is associated with poorer

performance in other social domains also suggests

that its substantial inclusion as a positive social per-

formance measure in corporate social responsibility

reports is, without concurrent disclosure of perfor-

mance in the other areas, potentially misleading.

While we concede that social reporting is still in its

evolutionary stage, we believe our results provide

evidence in support of Erusalimsky et al.’s (2006)

warning on the importance of challenging corpora-

tions’ claims of social responsibility.

The findings of this study are subject to several

limitations. First, the dollar amount of company

charitable contributions used in this analysis is self-

reported by the companies. Further, because there is

no commonly accepted standard for valuing in-kind

TABLE VI

Regression results for models using individual concern scores

Expected sign Parameter estimatesa Standard error Sig.b

Panel A – Total (unadjusted) giving

Control vars.

IndClass + 7.792 2.322 0.000

Size + 4.523 0.777 0.000

ROA + 1.177 0.172 0.000

Age + 0.037 0.024 0.118

Test vars.

EmpRel +/) )1.808 2.014 0.370

Env +/) 6.914 1.429 0.000

ProdSaf +/) 7.964 1.650 0.000

Model statistics




Panel B – Size-adjusted giving

Control vars.

IndClass + 694.8 118.12 0.000

Size +/) )241.7 39.52 0.000

ROA + 47.6 8.74 0.000

Age + 5.5 1.20 0.000

Test vars.

EmpRel +/) )139.4 102.46 0.174

Env +/) 148.1 72.66 0.042

ProdSaf +/) 434.4 83.90 0.000

Model statistics




aReported at 10)6.bSignificance levels are two-tailed.


services the reported levels of this giving may be

inflated for some firms. Finally, the empirical tests

were restricted to large U. S. public corporations,

and as such, the generalizability of the study results

may be limited.

A number of future research suggestions emerge

from the results of this study. First, the relationship

between corporate charitable contributions and

other dimensions of corporate performance could be

tested. For example, in addition to environmental

performance and product safety issues, corporate

governance structure, board composition, and

community relations are also important aspects of

corporate social performance. Second, to the extent

that it may be possible, differentiation across the

recipients of corporate charitable donations could

allow for a potentially richer assessment of the both

the intention and the effectiveness of giving as a

legitimating action. Finally, identifying the extent to

which changes in social performance, either at the

broad level or within specific areas of interest, lead to

changes in the use of philanthropic giving by cor-

porations would appear to be an interesting exten-

sion to this vein of research.

Notes

1 Missing data are included in the final analysis be-

cause the test results of including missing data and

excluding missing data are similar.2 As discussed below, in our tests on the extent of

giving we alternately use both the total giving measure

and a giving measure adjusted for firm size.3 Socrates is a proprietary database program issued by

Kinder, Lydenberg, Domini & CO. Inc. that provides ac-

cess to KLD’s ratings and other data pertaining to the social

records of over 3,000 publicly traded U. S. companies.4 We repeated all tests using giving figures adjusted by

sales and net income, respectively. Results on our social

concern variables were generally robust to the use of

these alternative adjusted giving measures. The only

exceptions were that the environmental concern vari-

able in the model using giving adjusted by sales and the

product safety variable in the model using giving

adjusted by income, although still positive, were not

significant at conventional levels. The total concern var-

iable remained highly significant in all models.5 Sayrs (1989, p. 26) notes that pooled time series

analysis treats the observations as if there were one

effect that fits all cross-sections and time periods in the

pool. To assure that the results of our analysis were not

driven by this restrictive assumption, we re-estimated

the models using dummy variables to allow effects to

vary across periods. Results were consistent with those

reported here. We also estimated models for each year

separately. With the exception that the environmental

concern variable, although still positive, was not signifi-

cant at conventional levels in the size-adjusted models

for years one and three, results were consistent with

those reported here.6 This difference reflects a finding that while larger

companies make larger contributions than smaller firms

with respect to the total dollar of giving, smaller firms

are significantly more generous in sharing their re-

sources through charitable contributions.7 Models were also estimated using each social con-

cern variable as the only concern measure in the model.

The results, not presented here, were consistent with

those reported for the models with all three social con-

cerns included as independent variables.

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Jennifer C. ChenSchool of Business,

Brigham Young University Hawaii,

55-220 Kulanui Street,

Laie, HI 96762, U.S.A.

E-mail: [email protected]

Dennis M. Patten

Department of Accounting–5520,

Illinois State University,

Normal, IL 61761, U.S.A.


Robin W. Roberts

Kenneth G. Dixon School of Accounting,

University of Central Florida,

4000 Central Florida Blvd., Orlando,

FL 32816, U.S.A.



Documents

Corporate Charitable Contributions: A Corporate Social Performance or Legitimacy Strategy?