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Research from the Strategic Management Journal shows that, for firms in certain sectors, charitable donations of $500,000 USD translate into increased sales of $3 million.
Charitable donations by companies have grown in value over the past 20 years. In 2007, U.S. firms spent $15.7 billion on philanthropy. Sears Roebuck attributed a sales bump of more than $13 million in recent years to a $50,000 product donation to needy families. Although anecdotes like this seem to suggest that doing good can be good business, questions remain concerning the causal link between corporate philanthropy and firm financial performance.
Researchers Baruch Lev (New York University), Christine Petrovits (New York University), and Suresh Radhakrishnan (University of Texas at Dallas) examined the impact of corporate philanthropy, a form of corporate social responsibility (CSR), on revenue growth for public companies between 1989 and 2000.
Their research builds on previous work investigating the business case for CSR. A key limitation of past research is the inability to establish causality (i.e. that CSR is, in fact, a driver of financial performance). The research team conducted a series of tests to address this issue, examining revenue changes in years following those in which donations were made.
The researchers hypothesized that appropriate corporate giving programs help firms attract and retain satisfied customers, leading to higher revenues in future years. Lev and colleagues found that firms donating today do indeed do better financially tomorrow—under certain circumstances.
In particular, the firms experiencing higher revenues in the years following their contributions were those who operate in consumer-focused industries. For firms in retail and financial services, a $500,000 increase in charitable contributions generated $3 million in sales. In industries characterized by large business or government customers, the same effects were not present.
Why? Donations, which improve the company’s reputation, can attract new consumers or make existing consumers less likely to switch.
Customer satisfaction is the key mediator in the relationship.
The causal tests performed by the research also examine other possible explanations for the relationship between philanthropy and subsequent increased revenues. But they found no evidence that factors such as the presence of institutional investors, management quality, industry growth or donations based on expectations of growth diminish the causal link between philanthropy and future revenue growth.
Also, the authors find only marginal evidence of a reverse causal relationship, suggesting that prior revenues have a very weak effect on future donations.
The researchers note that the effects of donations on revenue growth were observed at average donation levels; the returns from philanthropy likely diminish the more a company spends. Keep this in mind when deciding how much to spend.
Philanthropy, then, may be as justifiable as investments like R&D or advertising for firms selling to consumers.
What’s next? The authors hope future research will help firms pinpoint the optimal level of giving, measure other possible mediation paths between philanthropy and financial performance (e.g., innovation, labour relations), and support their findings using alternative methods such as natural experiments.
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