Journal article

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

L Zolotoy, D O’Sullivan, J Klein

Journal of Business Ethics | Springer Verlag | Published : 2019

Abstract

Prior studies in business ethics highlight the role of philanthropy in shaping stakeholders’ perceptions of a firm’s underlying moral tendencies and values (“character”). Scholars argue that philanthropy-based character inferences influence whether and how stakeholders engage with firms. We extend this line of reasoning to examine the impact of philanthropy on firms’ contracting costs in the capital market. We posit that philanthropy-based character inferences reduce investors’ agency concerns, thereby reducing firms’ cost of capital. We also posit that the strength of the philanthropy–cost of capital relationship is contingent on uncertainty regarding a firm’s character, visibility of a fir..

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