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Article
Character Cues and Contracting Costs: The Relationship Between Philanthropy and the Cost of Capital
Journal of Business Ethics (2017)
  • Leon Zolotoy, Melbourne Business School
  • Don O'Sullivan
  • Jill Klein
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 firm, and prevailing philanthropic norms. We test and find support for our arguments in a longitudinal study of philanthropy and the cost of capital. Our findings have implications for business ethics research on corporate philanthropy and corporate social performance and for organizational research on social judgment.
Keywords
  • social judgment,
  • character,
  • philanthropy,
  • contracting costs
Disciplines
Publication Date
2017
Citation Information
Leon Zolotoy, Don O'Sullivan and Jill Klein. "Character Cues and Contracting Costs: The Relationship Between Philanthropy and the Cost of Capital" Journal of Business Ethics Vol. forthcoming (2017)
Available at: http://works.bepress.com/don_osullivan/21/