In a paper recently published in Fordham Law Review, Corporate Philanthropy as Signaling and Co-optation, I examine a previously unnoticed mechanism through which corporate philanthropy (CP) can enhance company value: signaling.

Current value-enhancing accounts rest on the premise that CP “buys goodwill” for the company: companies, by acting nicely, can increase consumers’ or employees’ willingness to pay. But the necessary conditions underlying this theory are simply too unrealistic. For one, consumers have to be aware of companies’ CP policies and be willing to pay to delegate their philanthropy (that is, pay for someone else’s charitable preferences). We should focus less on charitable preferences and warm-glow concepts, and more on the potential of pro-social sacrifices to convey messages about a firm’s fundamentals. Explicit sacrifices of profits can serve as costly signals. They reliably convey messages about attributes that are important to shareholders, consumers, and employees – who are evaluating whether to invest in, buy products from, or work for those companies (that is, important even to those stakeholders who are strictly profit-minded).

To illustrate, the paper elaborates on the option of CP as a costly signal to investors. An increase in the level of donations could convey messages about financial strength to potential investors, who could infer that future free cash flows are perceived by insiders to be relatively high, that the company is now less financially constrained, or that the riskiness of future cash flows has decreased. Pro-sociality could also bridge asymmetric information between insiders and non-financial stakeholders, such as employees and consumers, by conveying messages about the styles and characteristics of top management and the extent to which they are subject to short-termism.

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