The Signal Effect of Philanthropy and the Fee Burden of Private SME

Abstract

Abstract:

Why do many Chinese SMEs (small and medium enterprises) owners hold a negative attitude toward philanthropic activities? Current literature reveals that some entrepreneurs instrumentally take advantage of philanthropy, while focusing less on others' reluctance. In this paper, starting with the signal theory, we propose that under the context of information asymmetry between local governments and companies' real operation conditions, philanthropic donation will incur more fee expenditures of a company. This "fee penalty" phenomenon accounts for the negative attitude of SME owners toward philanthropy. To prove this, we build a regression model using data from the 10^th nationwide surveys of Chinese privately-owned enterprises conducted by the All-China Federation of Industry. Results show that a company's expenditures in administrative and institutional fees have a significant positive correlation with its amount of donation in the year before; an entrepreneur's high expenditures on non-essential services intensifies this signal and predictive effect; whereas a high level of entrepreneur's ownership and a good local political and institutional environment significantly moderates the process. These results support our proposal on signal effect of philanthropy, and reveal both the micro and macro mechanisms on intensifying or weakening "fee penalty". Our research reveals that the signal effect of philanthropy functions abnormally in China and that SMEs and large enterprises face quite different micro institutional environments.

Key words: SME, philanthropy, signal effect, administrative and institutional fees

Zhu Hang, Yang Haixiang, Tan Jie. The Signal Effect of Philanthropy and the Fee Burden of Private SME[J]. , 2019, 31(9): 146-158.

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