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THE LINK BETWEEN CORPORATE PHILANTHROPY AND PRODUCT FAILURE
Borbala KulcsarPhD Candidate (2009-2012) Department of Business Administrat
Andrea FosfuriDepartment of Business Administration - Universidad Carlos I
Marco GiarratanaDepartment of Business Administration - Universidad Carlos I
Abstract:Title: The Link between Corporate Philanthropy and Product FailureName: Borbála KulcsárAffiliation: PhD Candidate, Universidad Carlos III de MadridYear of enrolment: 2009Expected final date: 2012E-mail address: [email protected]
In the last two decades firms have increasingly invested in philanthropic activities (CECP, 2008: McKinsey Quarterly, 2008), however the real aim and motivationto engage in such actions remained unclear. Previous research is characterized by the lack of a consistent theoretical grounding (Margolis & Walsh, 2003: Garriga &Melé, 2004) and inconsistent empirical findings of the identification of tangible and intangible benefits of social investments (Orlitzky et al., 2003: Margolis et al.,2007). Recently Godfrey (2005) tackled this issue and suggested that corporate philanthropy creates among the stakeholder groups of the firm a moral capital. Thismoral capital will act as insurance for shareholders by protecting the firms intangible assets and so contribute to shareholder wealth (Godfrey, 2005: 778). FollowingGodfrey s theoretical foundation we aim to provide empirical evidence on this conceptualization and fill an important research gap in the existing literature. Wehypothesize that the higher the contribution to charitable giving of a firm, the less product failure it will suffer. We base this relationship on the moral capital andincreased reputation of the firm that charitable giving creates among customers. Through this fairness perception (Xia et al., 2004) customers will become more toleranttoward responsible firms and their products which in turn will prevent product failure. Our main variable, product failure, is measured by failed trademarks obtainedfrom the USPTO database, whereas we use data from the KLD STAT database community dataset for our independent variable, charitable giving. Furthermore weincluded a set of control variables from the COMPUSTAT database. Our panel dataset covers a nine year period from 2000 to 2008. We selected our firm samplefrom the S&P 500, including in total 173 firms with 1557 firm year observation. To analyze our hypothesis empirically, we used the negative binomial regressionmethod. Our results are consistent with our hypothesis where we observe firms with higher charitable contribution to suffer less product failure indicating a crucialrole of corporate philanthropy in firm decisions.
JEL - codes: M14, L14, D21
1
The Link Between Corporate Philanthropy and Product Failure
Borbála Kulcsár1, Andrea Fosfuri
1 and Marco S. Giarratana
1
1 Universidad Carlos III de Madrid, Getafe (Madrid), Spain
[email protected], [email protected], [email protected]
Abstract - In the last two decades firms have increasingly invested in philanthropic
activities, however the real aim and motivation to engage in such actions remained unclear.
A recent theoretical research by Godfrey (2005) suggested that corporate philanthropy
creates moral capital and act as insurance for the firm by building a strong relationship with
stakeholder groups. We aim to provide empirical evidence on this conceptualization and
hypothesize that the higher the contribution to charitable giving of a firm, the less product
failure it will suffer, moreover that this relation will be more visible in industries focusing
primarily on individual consumers. Selecting our firm sample from the S&P 500 and using
data from the USPTO and KLD databases, we find significant results confirming partially
our hypotheses.
2
I. Introduction
To build and maintain a valuable corporate identity is a critical issue for firms. A good
image associated with well defined values and principles can provide several benefits to the
firm. It can nurture an overall good reputation; strengthen stakeholder relationship and
increase firm performance (Fombrun, 1996). To achieve and maintain a valuable corporate
identity firms often engage in philanthropic actions. A recent example is the large U.S.
company PepsiCo, which invested 4,1 million dollars over the past three years through its
foundation to the Waterpartner‟s Water Credit program to help and solve the worlds water
and sanitary problems as part of the Global Water Challenge. The Global Water Challenge
is a coalition of 24 leading companies in the world, such as Coca-Cola, Dow-Chemicals
and Procter & Gamble among others, donating for the same cause in collaboration with
foundations, NGOs and research organizations (CECP1, 2009).
We consider and examine corporate philanthropy as part of a larger mechanism of
corporate social responsibility (Carroll, 1999; Godfrey, 2005; Wang et al., 2008). Social
responsibility of corporations is defined2 as “the continuing commitment by business to
behave ethically and contribute to economic development while improving the quality of
life of the workforce and their families as well as the local community and society at large.”
Carroll (1999: 289) in his article described corporate philanthropy as a component of
corporate social responsibility as following: “For CSR to be accepted by the conscientious
business person, it should be framed in such a way that the entire range of business
responsibilities constitute total CSR: economic, legal, ethical and philanthropic.
Furthermore, these components of CSR might be depicted as a pyramid. To be sure all of
these kinds of responsibilities existed to some extent but it has only been in recent years
that ethical and philanthropic functions have taken a significant place.”
Previous theoretical (Margolis and Walsh, 2003; Garriga and Melé 2004; Porter and
Kramer, 2002; Donaldson and Dunfee 1994) and empirical research (Carroll et al., 1987,
Burke and Logsdon, 1996; Waddock and Graves 1997; Hillman and Keim 2001; Orlitzky
1 CECP Committee Encouraging Corporate Philanthropy, The Corporate Philanthropist 2009/2010 spring/summer
edition.
2 World Business Council for Sustainable Development, 2000.
3
et al. 2003) on corporate philanthropy is exhaustive, however somewhat ambiguous in the
results. Researchers analyze the social-business link from different viewpoints and disagree
on the real aim of philanthropic activities (Garriga and Melé 2004; Margolis and Walsh,
2003). Researchers argue that different findings in empirical research are primarily due to
the lack of a common theoretical grounding which would serve as a base to further research
and explain the motivation of firms to engage in social and philanthropic actions.
A recent work by Godfrey (2005) tackles this issue and emphasizes moral capital
building as a crucial element of corporate philanthropy. As Godfrey theorizes in his work,
corporate philanthropy in general creates positive moral capital among stakeholder groups.
This moral capital will act as insurance-like protection for the firm to preserve relational
based intangible assets, moreover it will increase shareholder wealth (2005: 777). As also
Fombrun and Shanley (1990) observed, firms which engage in philanthropic actions have
higher reputational value to consumers than other firms. When making product choices
consumers will trust more firms which invest in philanthropic actions through increased
reputational value than compared to other firms. We aim to provide empirical evidence
about this theoretical concept. We analyze the relationship between corporate philanthropic
actions and product failure.
Although firms spend significant amounts of resources on new product development
process and study the market conditions, the failure rate after new product introduction still
lies between 40-90% (Gourville, 2005). Therefore it is important to study this phenomenon
not only to increase product success but also to strategically consider corporate
philanthropy as an efficient tool to strengthen firm image. To represent this relationship we
hypothesize that firms which are highly involved in charitable giving, a well known form of
corporate philanthropy, will experience less product failure. Moreover that this relation will
be stronger for firms which are focusing on individual consumers, than for those firms
which are primarily targeting business entities as their focal consumers. These hypotheses
are explained through positive moral capital building which will influence customers
purchase decisions (Godfrey, 2005). We argue that those firms which are consciously
“doing good” and emphasize social and philanthropic actions can overcome critical
situations, by “insuring” themselves with a strong philanthropic involvement. These actions
4
will enhance reputation and will influence consumer‟s product choice to avoid product
failure. We study this phenomenon by observing the philanthropic actions of the largest
U.S. firms (S&P 500) using the KLD database and their product failures represented by
failed trademarks from the USPTO covering a nine year period, between 2000 and 2008.
We analyze our hypotheses through accessing the negative binomial regression model. Our
results partially confirm our hypotheses. We found evidence about increasing philanthropic
actions reducing the product failure of the firms. However our results show no support of
this relationship being stronger for firms targeting individual consumers.
In the following sections we will further analyze this connection between corporate
philanthropy and product failure and give further insight into our theoretical foundation and
empirical findings.
II. Corporate Philanthropy
Philanthropy defined by the Financial Accounting Standards Board (1993) is “an
unconditional transfer of cash or other assets to an entity or a settlement or cancellation of
its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an
owner.” As a part of corporate philanthropy, charitable giving is considered to be one of the
most important tools of firm contributions, which by definition is “an active effort to
promote human welfare in form of cash or non-cash related corporate donation to non-
profit organizations from firm profits or resources” (Merriam-Webster dictionary).
The history of corporate charitable giving originated in the 19th
century. From this time
until the beginning of the 20th
century firms mainly focused on the well-being of their
employees and their communities (Trost, 2006). Since then corporate giving has evolved
and gained territory involving all the stakeholder groups of the firm. With the economic
crisis in 2008 a slight decrease could be observed in the rate of corporate giving which
nowadays starts to rise again. Firms have recently increased their investments in
philanthropic actions and plan to further globalize them in the future (CECP, 2009).
5
When firms are engaging in different philanthropic actions they are likely to emphasize
them publicly. For instance the CECP3 is organizing yearly the International Corporate
Philanthropy Day, to promote firms philanthropic actions, give information about their
previous philanthropic involvements and experiences benefiting from the added media
interest to enhance future actions. However, as we can observe philanthropic actions of the
firms are often publicized, about the real aim and motivation behind these actions we know
little. Carroll (1999) examined in his work the aim of the corporation to engage in social
and philanthropic actions since the 1950s. The author argued that it was then when large
firms started to implement and act socially conscious in their decision making processes,
realizing the importance of the society as an important factor in the functioning of the
corporation on the long run. Carroll (1999) identified the different sources of motivations of
the firms to engage in such actions as economic, legal, ethical and philanthropic in nature.
To further examine the motivations of the firms, Garriga and Melé (2004) conducted an
extensive overview of the theoretical research on firm social involvement and made a
categorization. Firstly, the authors mentioned those studies which identify profit
maximization as the only obligation of the corporation towards the society. Pursuant to this
observation, a study by Porter and Kramer (2002) pointed out the importance of strategic
assessment of philanthropic actions into the firm‟s core capabilities in which philanthropy
is an instrument to achieve the ultimate goal of profit maximization by improving the
competitive context of the firm, fostering collaboration and influencing local market
features. Their premise emphasizes competitive advantage through the alignment of
philanthropic and business activities. Fostering the idea of strategic philanthropy, O`Brian
(2001) developed the Socially Anchored Competencies model (SAC). The model
demonstrates how business and social benefits can be achieved by merging the core
competencies and social objectives of the firm fitting with stakeholder interests. An
additional dimension of the model describes the possibility of creating strategic alliances
with non-profit organizations to foster and implement adequate social projects. Other form
to promote corporate philanthropy as a tool to enhance corporate performance is cause-
related marketing (Varadarajan and Menon, 1988). Through advertising customers are
3 CECP: Committee Encouraging Corporate Philanthropy
6
attracted to make donations related to purchase. Following the categorization of Garriga
and Melé (2004), the work of Donaldson and Dunfee (1994) argued the importance of the
politically correct assessment of social actions and developed the Integrative Social
Contract Theory (ISCT). The model focuses on the wider context of a business situation,
including cultural, social and institutional differences and argues that a macro social
contract involving higher rules provide the base for any social engagement framed by
institutions and by the moral consent of the participants. The third category of theoretical
studies on corporate philanthropy identified by Garriga and Melé (2004) considered that
social claims coming from different stakeholder groups of the firm must be integrated into
the business. Freeman (1984:39) identified first the stakeholder groups of the firm and
defined stakeholders as “those groups who have a stake in or claim on the firm. Specifically
I include suppliers, customers, employees, stockholders, and local community….”.
Building on stakeholder theory Barnett (2005) introduced a construct defined as the
Stakeholder Influence Capacity (SIC) of the firm. Barnett stated that firms engage in
philanthropic actions to enhance their relationships with stakeholder groups. These actions
can not only enhance firm relations but also improve financial performance. Firms will
benefit from stakeholder focus by building trust and avoiding risk and uncertainty.
Obtaining different results from philanthropic actions will mainly depend on previous
stakeholder relationships. The last category of previous theoretical studies considered by
Garriga and Melé (2004) focused on the ethical considerations of social actions and is
closely related to stakeholder involvement. Donaldson and Preston (1995) emphasized the
normative base of the theory; the authors mentioned the „philosophical ethics‟ between the
firm and the society. As also a report of the American Law Institute4 (1992: 72) stated:
“The modern corporation by its nature creates interdependencies with a variety of groups
with whom the corporation has a legitimate concern, such as employees, customers,
suppliers, and members of the communities in which the corporation operates.” Here we
can also observe the „normative‟ connection between stakeholders and the firm to behave
ethically and mutually responsible.
4 American Law Institute report, Principles of Corporate Governance (1992: 72).
7
The above described multi-faceted potential of corporate social and philanthropic
actions also manifested itself in previous empirical research as one could observe differing
results focusing mainly to entangle the relationship between social and financial benefits of
the firm (Carroll et al., 1987, Burke and Logsdon, 1996). For instance while Aupperle et. al.
(1985) found a negative relationship between social responsibility and financial
performance, Hillman and Keim (2001) obtained mixed results on how stakeholder
management and social issue participation measured by the KLD dataset, is affecting
shareholder value using regression analysis. However, a meta-analysis covering 52 studies
by Orlitzky et al. (2003) found an overall positive relationship between firm‟s social actions
and financial performance. The study moreover examined the mediator effect of firm
reputation stating that firms which contribute to philanthropic activities aim to create a
positive firm image and increase firm reputation. Fombrun and Shanley (1990) found also
that those firms which are more involved in charitable giving will earn higher public
evaluation based on findings analyzing the Fortune Magazine‟s reputational survey. Such
as in a recent study Lev et al. (2010) observed, there exist a positive relationship between
charitable giving and firm sales mediated by customer satisfaction and sensitivity.
As these results show, analyzing empirically corporate social and philanthropic actions
related to firm performance can result ambiguous and difficult for a general interpretation.
This ambiguity is probably due to the lack of a well defined theoretical grounding (Garriga
and Melé, 2004, Carroll, 1999) which would give the foundation for further research.
The theoretical work of Godfrey (2005) models a generalized grounding for the
philanthropy-performance link drawing on risk management principles and insurance
theory. It argues how philanthropic activity will generate positive moral capital, when the
actions are evaluated positively by the affected stakeholder groups (2005:782). The model
shows how philanthropic actions provide insurance-like protection to the firm‟s intangible
assets by mitigating negative valuations (2005:783). The argument of Godfrey (2005) on a
causal relationship of philanthropic actions and performance relies on the reputational value
of the firm (Fombrun, 1996). Reputational value becomes important by influencing
stakeholder actions and decisions on investment. The author also examines how moral
capital provides insurance for a firm´s relational capital unless the harm was caused
8
consciously or by negligence (2005: 788). For instance consumers can be more skeptical
towards firms for which the motive to engage in philanthropic actions is perceived as „self-
serving‟ or the products are perceived as harmful for the society. An example5 is Altria
Group, which owns the brand Marlboro. Altria Group has one of the most elevated
corporate philanthropic investments. In the past decade it donated over 1 billion dollar in
cash donations focusing mainly on health and disaster recovery issues. In the year 2004
Altria Group donated 113 million dollars in cash and so occupied the third place of
Business Week’s ranking of best corporate philanthropist firms. However in the case of
Altria Group even with the great amounts of donations can result difficult to build a
positive firm image given their profile of producing a lethal product.
As we have mentioned it before, unless the harm is perceived as caused consciously or
by negligence, corporate philanthropy will strengthen a well defined corporate image.
Consumers will associate organizational values with firm products and therefore
consumption will be influenced by the positive and negative actions of the firm. For this
reason, it is important for firms to realize the benefits of philanthropic investments as it can
have an effect on product success (Burke and Logsdon, 1996). As Husted and Allen (2007)
also mention, consumers observe social and philanthropic activities of the firm. Therefore
an increased participation in such actions will positively influence value creation of the
firm by increasing consumer loyalty, product success and attracting new consumers.
Positive firm associations through corporate philanthropic activities can favorably influence
consumer reactions towards the firm‟s products (Brown and Dacin, 1997). Consumers will
associate firm social and philanthropic actions with its products if there is a clear
connection between the actions and the representation of the product. Therefore the
visibility of such actions is crucial to obtain a positive evaluation of firm reputation which
will relate to better performing products given the consumers trust in the company (Burke
and Logsdon, 1996). This will in turn shift the focus towards consumers and emphasize
relational-capital.
5 http://www.businessweek.com/magazine/content/05_48/b3961607.htm
9
Such an observation of an existing relationship between corporate philanthropic actions
and product failure has not been addressed before. Through our concept and the applied
theoretical mechanism we prove empirically how philanthropic actions can affect firm
evaluation and prevent product failure. To examine this link is important to prove tangible
benefits of philanthropic actions through the improvement of new products failure rate,
which is considered to lie between 40 % and 90 % after market introduction (Gourville,
2005).
III. Product failure
New product development is a complex process of firms. It not only requires adequate
resources, but also a comprehensive knowledge and management of internal and external
capabilities. Previous literature on NPD6 is exhaustive and has implications for instance in
the fields of marketing (Souder, 1988; Gupta et al., 1986), knowledge management (Katila
and Ahuja, 2002) and open innovation (von Hippel, 1998).
The complexity of the NPD process manifests itself in firm decisions as one has to take
into account several viewpoints. For this reason we find various studies in the previous
literature focusing on the success/failure factors of the new product development process
(Griffin and Page, 1993; Montoya-Weiss and Calantone, 1994; Cooper and Kleinschmidt,
1995; Henard and Szymanski, 2001). A successful product introduction depends on
different aspects as for instance meeting customer needs, technological preparedness and
cooperation between intra-organizational units (Dougherty, 1992). Firms need to align their
product development process with the overall firm strategy creating synergy between the
two in order to obtain a viable product (Cooper and Kleinschmidt, 1995).
Although, when firms launch a new product to the market there is always a possibility
to fail. Statistical demonstrations shows that even though firms invest high amounts of
time, money and effort in developing a new product, one can observe higher rate of new
product failure than new product success (Patrick, 1997). If failure occurs it can negatively
6 NPD: new product development
10
affect firms‟ financial performance, cause bad publicity or increase costs (Davidson and
Worrell, 1992). Product failure can be due to several reasons given the complexity of the
development process on the organizational level. Possible causes of failure can arise from
the developer‟s side or from the consumer‟s side. Problems which contribute to product
failure from the developer‟s side are often related to product design, product quality and
safety. As Bloch (1995) stated in his work, the design of a product can be substantial in its
positioning in the marketplace, moreover it has to fulfill societal responsibilities. Beamish
and Bapuji (2008) studied product failure due to quality and safety problems. The authors
pointed out that these problems can affect firm reputation, as the example of the major US
toy company Mattel showed. The other reason why new products fail is the inaccurate
assessment of consumer preferences. As Joshi and Sharma (2004) stated in their work
creating a reliable stock of customer knowledge will largely enhance new product
performance. Cooper and Kleinschmidt (1995) found that consumer focus of firms is a key
factor of new product development success. To understand consumer preferences and build
consumer knowledge, firms have to interact with consumers and provide adequate
information about firm activities and its products. To reduce uncertainty surrounding
consumers, firms are likely to engage in common actions. As Dougherty (1992) stated
previously, collective action is important for both parties: “Innovation requires collective
action, or efforts to create shared understandings from disparate perspectives.” (1992:192).
Therefore one can find extensive literature on consumer involvement in production design
and organizational activities (Kaulio, 1998; Grudin, 1994; von Hippel, 1986). Involving
consumers in product development provides the firm with a better knowledge about
consumer needs, creativity and problem solving options.
As we have mentioned it before, consumer perception of firm activities can shape the
overall verdict of the firm and affect consumption. Firms have to provide information and
interact with consumers in order to avoid product failure. Signaling a positive image of the
firm through corporate philanthropy will contribute to a higher tolerance among consumers.
As Auger et al. (2003) argued, ethical features of the product have an influence on
consumers purchase decisions. Such as Lee et al. (2009) mentioned, corporate philanthropy
based on altruistic motives will positively influence the attitude of consumers and influence
purchase decisions. The authors argue that consumers will obtain a positive signal from
11
corporate philanthropic actions and therefore approach products from firms engaged in
such activities. Considering these previous findings in the following section we present our
hypotheses.
IV. Hypotheses
Customers often evaluate a product from organizational associations (Brown and Dacin,
1997) and rely on public information. When making purchase decisions consumers expect
firms to behave ethical and truthful with their business environment and the society in
general (Creyer and Ross, 1997). For this reason firms aim to signal a positive image
towards consumers by investing in philanthropic activities (Godfrey, 2005; Peloza, 2005).
Contributing to charities is one way for firms to represent a socially responsible behavior.
To obtain a positive evaluation from the consumer, Xia et al. (2004) describes a conceptual
framework of price fairness perception in a consumer-firm relationship. The framework
demonstrates that the base of any such relationship involves trust. At an initial stage where
consumers have no previous purchase experience with the seller firm will base their trust on
the firm‟s image which can be deducted from public information of the firm‟s goodwill. A
positive image will be a signal for initial trust which later, after repeated purchase, will
convert to trustworthiness of the firm, based on knowledge and interpersonal relationship
(2004: 5).
Moreover a positive image of the firm will make consumers tolerant towards firm
deficiencies and prevent product failure. As Knox and Maklan (2004) stated, when a firm is
trusted by stakeholders and is pursuing social and philanthropic actions will reduce risks
arising from safety issues, product recalls and possible loss of corporate reputation.
Therefore firm donations may also behave as an insurance policy of the firm (Godfrey,
2005; Klein and Dawar, 2004). Consumers will accept product offerings and stand to firms
strategic decisions creating a closer link with the firm. This link will enhance the firms‟
relationship-based intangible assets (Godfrey, 2005).
Through this argument, we claim that a firm with strong philanthropic presence
emphasizing charitable giving will signal a positive and socially responsible behavior to
12
stakeholder groups, including consumers. This behavior of the firm will form an initial trust
among consumers and enhance the trustworthiness of the firm and its products. Consumers
when making purchase decisions will choose product from a firm with a positive image
over other firms‟ products. Consumers will become more tolerant towards responsible firms
which will support the viability of their products and prevent product failure. Therefore we
hypothesize that increasing investment in charitable giving of the firm will result in less
product failure.
Hypothesis 1: The higher the contribution to charitable giving of a firm, the less product
failure it will suffer.
Previously researchers argued that firms should apply different marketing practices
depending whether they are oriented towards individual consumer or industry market
(Webster, 1978). Coviello and Brodie (2001) argued that firms producing for consumer
market engage more in transaction marketing, using tools of advertising, sales promotion
and public relation. Such marketing communication focusing on branding and visual brand
identity will enhance consumer loyalty. Therefore those firms which are focusing on
individual consumers and are contributing to charitable giving will suffer less product
failure, given a better association of philanthropic actions with the firm identity through its
visibility.
As a study by Lev et. al. (2010) argues, corporate philanthropy and the visibility of
the firm‟s goodwill will be better observed and higher evaluated for those firms which sell
their products to individual consumers rather than to businesses, industry members.
Separating two categories high and low individual consumer sensitivity given the firms
target consumers (Lev et al., 2010) we identify due to the characteristics of our dataset the
category “consumer goods” as the industry of specified high individual consumer sensitive
and all other categories as specified low individual consumer sensitive.
13
We hypothesize that firms which focus on individual consumers and are engaging in
philanthropic actions namely charitable giving, will achieve better product performance
than other firms, through the better visibility and proximity between philanthropic actions
and individuals as target consumers.
Hypothesis 2: Firms with high individual consumer sensitivity contributing to charitable
giving will suffer less product failure than firms with low individual consumer sensitivity
contributing to charitable giving.
V. Methodology and Data
We selected our firm sample from the S&P 500 of largest U.S. firms list for the year
2006. At the end of our sample period in 2008 we identified 173 firms which remained
consistent along our period and became no object to bankruptcy, merger or acquisition and
were also concurrent with the KLD7 database S&P 500 identification through the same
period between 2000 and 2008. Therefore in our final sample we included the selected 173
firms with 1557 firm year observation. We chose the S&P 500 firm list for our study to
capture the visibility of the largest charitable donations and to dispose the majority of the
trademarks filed in the United States. Our dataset is a balanced panel dataset, where each
firm is observed the same number of times covering our nine year period from 2000 to
2008.
Our general model is Y ≈ ƒ(X, β). Where Y represents our count dependent variable,
product failure, X our explanatory variable charitable giving and β is a vector of
parameters. We use negative binomial regression model for our data analysis. We chose
this model to capture the over dispersion in our sample, having greater variance than mean
given that the Poisson model would be inappropriate holding the criterion of mean and
variance equality (Greene, 2003). The likelihood ratio test of our negative binomial model
7 KLD: Kinder, Lydenberg, Domini Research and Analytics Inc.
14
also confirms our model choice. Moreover we applied the Hausman test on our data to
decide whether to use random or fixed effects specification in our model. The results of the
test led to the rejection of the null hypothesis of uncorrelation between regressors and
random effects (p-value less than 0.01%). Therefore we applied the fixed-effects negative
binomial regression model to test both of our hypotheses. We conducted our empirical
analysis with the STATA 10 statistical software.
Variables
Product failure. Our dependent variable is product failure, which we measure by failed
trademarks. The Lanham Act defines a trademark as “any word, name, symbol, or device,
or any combination thereof used by a person to distinguish his or her goods or services
from those sold by others.”8 Trademark failure can occur due to abandonment, improper
licensing and genericity as determined by law9. We consider in our recent study trademark
failure due to abandonment, which is defined as the discontinuous use of the trademark
with no intent to resume its use, as well as the non-use of the trademark for three
consecutive years10
. The discontinuous use of a trademark is decided upon the
circumstances and abandonment will be legally exercised with the aim to prevent the
occupation of potentially useful marks. As in a legal form the commercialization and
marketing activities of the firm related to the products are represented by trademarks, it is
crucial to actively use the trademark to maintain its visibility for the public and enhance the
firm-product association among consumers. Therefore our proxy of product failure
represented by failed trademarks is relevant and reliable, strongly related to the consumer-
focus of the firms.
Although trademarks exist and are legally clarified since the 19th
century (Trademark
protection Act of 1881) their use for empirical research is quite recent. Previously
8 Lanham Act, 15 U.S.C.,1127
9 Lanham Act, 15 U.S.C. 1064; 15 U.S.C. 1058
10 http://cyber.law.harvard.edu/metaschool/fisher/domain/tm.htm
15
researchers mostly relied on patent data to measure product development and product
innovation (Katila and Ahuja, 2002) whereas nowadays we find a growing number of
studies using trademark data as a measure of innovation effort (Mendonca et al., 2004) or
branding effort of the firms (Krasnikov et al., 2009). Our product level data contains
trademark data from the USPTO11
with 68.184 trademarks.
Charitable giving. Our explanatory variable is charitable giving. Charitable giving is a
determining focus of firms representing the firm‟s visibility of goodwill. We have collected
data on charitable giving from The KLD12
Research and Analytics Inc. The KLD STATS13
dataset covering the S&P 500 represents positive and negative issues for each company
yearly from 1991 with a binary (1/0) yes/no value. KLD rates the social, environmental and
governance performance of the companies using positive and negative indicators, strengths
and concerns. Companies are rated in seven major qualitative issue areas: environment,
community, corporate governance, diversity, employee relations, human rights and product
quality and safety.14
Data on the strengths of the community area are represented by the
categories of charitable, non-US charitable and innovative giving, support for education
and housing, volunteer programs and other strengths. From these community strength
variables we specifically selected the charitable giving15
variable as our measure for
philanthropic activity, represented by a binary 0/1 variable. Taking the value 1 if firmi has
consistently given over 1.5% of trailing three-year net earnings before taxes (NEBT) to
charity, or has otherwise been notably generous in its giving, and 0 otherwise.
11 USPTO: United States Patent and Trademark Office
12 KLD: Kinder, Lydenberg, Domini Research and Analytics Inc.
13 KLD STATS: Statistical Tool for the Analysis of Trends in Social and Environmental Performance
14 Information obtained from the official KLD website, see in References.
15 KLD Stats data description about Charitable Giving: The company has consistently given over 1.5% of trailing three-
year net earnings before taxes (NEBT) to charity, or has otherwise been notably generous in its giving.
16
Control variables
Firm specific control variables were obtained from the Compustat database. Return on
equity (ROE) was calculated as the net income after tax divided by the shareholder equity.
We use this variable to control for firm performance and for firm reputation. As Fombrun
and Shanley (1990) mentioned in their work corporate reputation is represented partially by
the financial performance of the firm arising mainly from accounting data. The number of
employees (Employees) is considered to capture the size of the firm. The variable R&D
expenditure (R&D expenditure) represents all costs incurred during the year that relate to
the development of new products or services, this variable is important to control for the
different levels of R&D investments among the firms. The variable sales (Sales) represent
the net sales of the firm, controlling for the size of the firms. For all the above mentioned
variables we take the natural logarithm. Advertising expenses (Advertising dummy)
represents advertising media (i.e., radio, television, and periodicals) and promotional
expenses with a binary 0/1 variable, which takes the value 1 if the given company had
advertising expenses for our given years and 0 otherwise. Moreover we included as a
control variable the total number of trademarks (Trademark Total #) as obtained from the
USPTO database. Finally we created two dummy variables, time dummy variables (Time
dummy) for each year from 2000 to 2008 and sector dummy variables (Sector dummy)
including ten different sectors identified by the aggregate economic sector type16
to control
for the different industrial sectors included in our sample.
VI. Results
In Table 1 and in Table 2 we represent the descriptive statistics of our variables and
the corresponding correlation matrix.
16
Compustat Economic Sector (codes): Materials (1000), Consumer Discretionary (2000), Consumer Staples (3000),
Health Care (3500), Energy (4000), Financials (5000), Industrials (6000), Information Technology (8000),
Telecommunication Services (8600), Utilities (9000).
17
Table 1. Descriptive statistics
Table 1. contains the number of observation, mean, standard deviation and maximum
and minimum values for our key variables. We can observe that an average firm in our
sample owns 31 trademarks. Moreover those product failures for an average firm, which we
represent by failed trademarks, are nearly 14 products.
Table 2. Correlation matrix
In Table 3 we show the results of our first hypothesis where we test the relationship
between charitable giving and product failure of the firms. We applied fixed effects
18
negative binomial regression model to test this hypothesis. Our results are statistically
significant showing a strong negative relationship between our dependent and explanatory
variable confirming Hypothesis 1. The more a firm invests in charitable giving the less
product failure it will suffer as consumers will perceive the firm truthful and fair. In our
model we included the control variable R&D expenditure and Advertising dummy which are
significant and positive in sign.
Table 3. Fixed effects negative binomial regression (standard errors in parentheses)
Significance levels *** p<0.01, ** p<0.05, * p<0.1
19
In Table 4 following the industry classification by Sharpe17
(1982) we again conducted
a fixed effects negative binomial regression to test our second hypothesis, to observe the
influence of charitable giving on product failure taking into account the target consumers of
the firm, depending whether it is an individual consumer or a business to business
relationship. After applying the classification of Sharpe (1982) to our firms due to their
primary SIC codes, we use the specification by Lev et al. (2010) regarding high or low
individual consumer sensitivity. One category the “consumer goods” is specified in our
model as high individual consumer sensitive, all other categories are specified as low
individual consumer sensitive. Before testing Hypothesis 2 we conducted a T-test on the
Beta coefficients of the two groups high and low consumer sensitive firms, where we
obtained confirmation about the distinction between these groups (Prob > chi2 = 0.0393).
The results we represent in Table 4 are not supporting our second hypothesis, showing
statistically significant results about a stronger relationship for low individual consumer
sensitive firms associated with stronger visibility of firm identity through charitable
contribution and the product failure of the firms. We observe less product failure in firms
with low individual consumer sensitivity than for firms with high individual sensitivity.
In our models, among firms with low individual consumer sensitivity our explanatory
variable Charitable giving is more significant than for firms with high individual consumer
sensitivity. This result can probably be due to „consumer firms‟ having more accurate
information about the „seller firm‟ through a vertically integrated relationship between the
two firms, where the similarity of philanthropic strategy could play an important role.
Moreover it could be the case that firms as end consumers engage more likely in
relationships with firms having a good corporate image to enhance their own reputation.
For this reason it will be a crucial aspect for the „seller firm‟ to possess a strong corporate
17
Industry classification by Sharpe (1982) on 4-digit SIC codes: (1) Basic Industries: 1000-1299,1400-1499, 2600-2699,
2800-2829, 2870-2899, 3300-3399; (2) Capital goods: 3400-3419, 3440-3599 exc. 3523, 3670-3699, 3800-3849, 5080-
5089, 5100-5129,7300-7399; (3) Construction: 1500-1599, 2400-2499, 3220-3299, 3430-3439, 5160-5219; (4) Consumer
goods: 0000-0999, 2000-2399, 2500-2599, 2700-2799, 2830-2869, 3000-3219, 3420-3429, 3523, 3600-3669, 3700-3719,
3751, 3850-3879, 3880-3999, 4813, 4830-4899, 5000-5079, 5090-5099, 5130-5159, 5220-5999, 7000-7299, 7400-9999;
(5) Energy: 1300-1399, 2900-2999; (6) Finance: 6000-6999; (7) Transportation: 3720-3799 exc. 3751, 4000-4799; (8)
Utilities:4800-4829 exc. 4813, 4900-4999; (9) Others: all other SIC codes.
20
philanthropic attitude. However these possible explanations should further be tested to
obtain stronger evidence about our result for the second hypothesis.
Table 4. Fixed effects negative binomial regression (standard errors in parentheses)
Significance levels *** p<0.01, ** p<0.05, * p<0.1
21
VII. Conclusion
To achieve social recognition and enhance a positive corporate image firms
increasingly focus on different stakeholder groups and tend to create a closer relationship
with them. Investing in corporate philanthropy, which is considered to be an important part
of corporate social responsibility (Carroll, 1997), will support a positive public evaluation
and increase the truthfulness of the firm. A recent theoretical work by Godfrey (2005)
highlighted moral capital building as a mechanism to obtain positive public evaluation
through corporate philanthropic actions. Moral capital building will create protection for
the firm‟s intangible assets such as stakeholder relations and accordingly increase
shareholder wealth.
In our recent study we focus on one particular stakeholder group, the group of
consumers. We aim to prove that firms which are investing in corporate philanthropic
actions namely charitable giving will affect positively consumer‟s perception about firm
products and so prevent product failure. Xia et al. (2004) argued that trust and cognition of
fairness will influence consumers to engage in any relation with the firm. Building on these
arguments we first hypothesize that firms will suffer less product failure if they invest in
charitable giving. Secondly we hypothesize that this relationship will be more visible for
firms focusing on individual consumers.
We measure product failure with failed trademarks obtained from the USPTO database
which is a recent measure in the strategic management literature. Our results are partially
confirming our hypotheses. We found that firms which engage in charitable giving suffer
less product failure. However our results showed no support about this effect being more
significant for firms with higher individual consumer sensitivity.
Our results imply a general conclusion of consumer response to firm actions, that a
positive action will be rewarded. In our future research we aim to focus on the economic
benefits of charitable giving and find further evidence of the tangible benefits of corporate
philanthropy.
22
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