Signaling through corporate philanthropy

We deconstruct corporate philanthropy donations (CPDs) into expected CPD and excess CPD and examine their impact on firms' future market performance. We also examine various moderating effects, including political connection and market development. Using a data set comprising 13,939 firm-year observations for firms with A-shares listed on the Shenzhen and Shanghai Stock Exchanges between 2003 and 2014, the study offers three key findings. First, consistent with the signaling hypothesis, we find a positive association between excess CPD and market returns; however, expected CPD is not related to market returns. Second, the interaction of expected CPD and state-owned enterprises is negatively related to firms' future market reactions. This is because investors perceive these enterprises' CPD activities as forced apportionment. Third, market reactions improve if firms are located in less developed regions and contribute excess CPD.