Private Benefits and Corporate Investment and Financing Decisions: The Case of Corporate Philanthropy

What is the opportunity cost of private benefits of control? Using dollar cost of corporate giving to measure private benefits of control, we show in a recent study that (i) the consumption of private benefits creates a managerial aversion to new external financing due to the threat of enhanced scrutiny from external capital providers and (ii) this aversion to external financing leads to non-optimal corporate investment decisions. In addition, we provide new evidence that these investment distortions reduce shareholder wealth.

One implication of Jensen’s (1986) free cash flow view of the manager-shareholder agency problem is that each dollar of rent … Read more