Abstract: This paper adopts free cash flow creativity to proxy for a firm's donation capacity and examines the association between firm's donation capacity and donation amount in China. We argue that strategic donation motivations contribute to the deviations between firm donation amounts and donation capacity, and thus different donation motivations between SOEs and non-SOEs lead to different associations between firm donation capacity and donation amount. Consistent with our argument, we find that non-SOEs with lower free cash flow creativity donate more and this negative relationship is more significant when non-SOEs have stronger incentives to maintain political connections and more likely obtain benefits from government. Second, we document a positive association between firm's donation capacity and donation amounts in SOEs with strong free cash flow creativity. This positive relationship is more significant when SOEs are under the strict internal and external supervision. Lastly, non-SOEs with insufficient donation capacity obtain more accesses to economic resources through donation, as evidenced by more government subsidies and credit preferences, while SOEs do not. Our findings suggest that non-SOEs' donations are dominated more by strategic motivations than by donation capacity, while SOEs' donations are mainly driven by social responsibility motivations. Overall, our study adds to the growing literature on firm donation behavior and helps stakeholders to better understand the intrinsic logic of corporate donation behavior in China.

Key words: free cash flow, donation capacity, donation motivation