Agency Problems in Corporate Foundations

I study whether corporate foundations allow controlling shareholders of related firms to concentrate ownership at the expense of philanthropic purposes. Using the 2013 Fair Trade Act amendment in Korea, which reduced controlling shareholders’ ownership concentration in large business groups (chaebols), I conduct a difference-in-differences test and find that corporate foundations of exposed chaebols increased ownership in member firms by 5%, particularly where controlling shareholders had greater direct control. Corporate foundations reduced philanthropic expenses and the member firms’ value of cash donations decreased by 1%. Results suggest that controlling shareholders benefit through corporate foundations, undermining donation value for minority shareholders.