Do good and talk about it
Today, every major corporation seems to have a charity that they donate money to as part of their corporate social responsibility (CSR) efforts. Bigger companies usually not only give to established charities but start their own charities and foundations. I have met many a cynical investor in my life who claims that these efforts of charitable giving are just a waste of money. But essentially, every Dollar donated to charity should subtract a dollar from the value of the company.
Since a company is valued as the present value of its future cash flows, a company that earns $1bn this year and then decides to give $0.5bn to charity should be worth $0.5bn less than the company that does not give anything to charity and instead hands these profits to investors.
I admit I am one of those sceptics who think that companies’ efforts to give to charity are often little more than an effort in greenwashing, but it seems there is some monetary benefit to it.
Jean-Francois Bonnefon and his colleagues looked at the prices paid for shares of companies that donated to charities and those that did not. They did this in a laboratory experiment so they could control the donations of the (virtual) corporations and identify the reasons why investors reacted the way they did. It turns out that for every Dollar a company donated to charity, investors were bidding up the valuation of the company by 0.85 Dollars. In other words, if companies gave away some of their profits, they not only created goodwill but also got a boost in their valuation. Admittedly, the boost in valuation did not fully compensate for the loss in earnings donated to charity, so from a pure shareholder value perspective, investors were worse off after company donated to charity than before, but the loss was minimal.
Furthermore, the researchers also tested what happened if a company decided to behave antisocially and found that in these cases, the valuation of the company dropped drastically. For every Dollar of loss caused to a charity or society overall, the valuation of the company dropped by 0.9 Dollars.
To me, this shows two things. First, reputation matters for company valuations. A company that is known to act responsibly will benefit from higher valuations than a company that is neutral on societal issues. Even more, a company that creates damages to society will suffer a significant valuation hit if these damages become widely publicised. Second, it isn’t necessarily a good idea to give away large parts of corporate profits since the goodwill introduced in company valuations is not sufficient to make up for the loss of profits, but if you do give away some of your profits to charity, then as a company, you should make sure everyone knows about that. The more you publicise your good deeds, the more investors will give your stocks a valuation boost for it.