An Analysis of a Signalling Model of Corporate Philanthropy for Selected Philippine Banks

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ABSTRACT

This study attempts to determine whether a signaling model of corporate philanthropy exists in the Philippine banking industry. Using an index of philanthropy and testing it against various firm and industry specific variables, the results affirm that advertising expense is a good signal of philanthropy. However, philanthropic activity in the Philippine banking industry appears to be more dependent on higher or increased revenues rather than a part of the bank's overall strategy. Results further suggest the need for more disclosure and higher philanthropic spending relative to revenues.

INTRODUCTION

Recent calamities in the Philippines have re-awakened the spirit of giving among individuals and corporations alike. For instance, donations to the Philippine Red Cross alone for victims of Typhoon Sendong have reached almost P 100 million as of the end of December 201 1 and donation drives continue as of this writing.

What is significant about these donations is not only that it is across individuals and corporations, but majority of these donations are in the form of cash. This indicates not only that the spirit of "bayanihan" (camaraderie; care for others) still exists but in spite a challenging economic situation, people were willing to share whatever resources they have.

This expression of giving is often considered as a form of philanthropy. And while many motives are attributed to such a gesture (such as the warm glow effect), philanthropy can also be seen as a first step towards good corporate citizenship and corporate governance. This study intends to adopt a signaling model of corporate philanthropy where it is more prevalent in industries with higher competition like the Philippine banking industry.

The model starts with an index of philanthropy commonly used in social investing. The index is then tested against the bank's advertising expense as a median against other banks and as a function of the bank's net income. Finally, a third model is made that tests profitability against other control variables and the philanthropy index.

RECENT STUDIES IN CORPORATE PHILANTHROPY

Since Friedman's 1993 assertion of what a firm's responsibility is to society, countless studies have been made in defining what makes a "good" corporate citizen. Citing Reidenbach and Robin, Teehankee (as included in Santos, 2011) traces the five stages of corporate moral development: the amoral (winning at any cost); the legalistic (concerned with the law, but not the spirit); the responsive (being responsible because it is expedient, not because it is right); the emergent ethical (seeks to instill the social contract throughout the corporation); and the ethical (balances profits and ethics). It is assumed in the stages that it is evolutionary and that companies strive to eventually become ethical in the future.

In developing an altruistic model of corporate social responsibility, Small and Zivin (2005) noted that firms that advertise their social and environmental good works in effect solicit charitable contributions from customers, employees, investors and other stakeholders. As a result, a choice develops among investors between corporate philanthropy and direct charitable giving, but overall there is no change in corporate valuations and the overall supply of good works. Fioravante (2010) observes on the other hand that corporate philanthropy is a viable strategic option in developing marketing strategies, a view that was proven empirically by Brammer and Millington in 2005. Using a large cross-section of UK companies, they were able to show that those which had higher philanthropic expenditures tend to have good reputations and that reputational indices reflect financial performance over other factors. In examining press release donations of US companies during the 2004 tsunami in Southeast Asia, Patten (2008) was able to discover a significant 5 -day cumulative abnormal return. And while the timing of press releases did not seem to have influenced the return, the size of the donations did. …