Accounting for corporate-sponsored foundations

In the wake of recent corporate governance scandals, corporate philanthropy has received increased attention. This study examines whether managers strategically use contributions to meet financial reporting objectives. Specifically, corporate-sponsored private foundations allow firms to maintain stable levels of giving to charitable causes while providing substantial discretion as to the amount of contribution expense recorded on the income statement in any given period. I find that firms which reported small earnings increases made large income-increasing discretionary foundation funding choices. In particular, this result is associated with firms that have greater equity market incentives to manage earnings. I also find that firms which made large income-decreasing discretionary payins were more likely than firms which made small income-decreasing discretionary payins to report strings of earnings increases in subsequent years, after controlling for performance. These results are consistent with the foundation acting as an off-balance sheet reserve.