Investment Decisions of Corporate Foundations and Controlling Shareholder Entrenchment

We study how corporate foundations use donated capital to benefit related controlling shareholders at the expense of the value of minority shareholders. Using Korea’s 2014 Fair Trade Act amendment, restricting ownership concentration of controlling share- holders in large business groups, we use difference-in-differences tests and find that foundations related to exposed business groups increased shareholdings in member firms, preserving controlling shareholders’ ownership. The market reacted negatively, especially for firms with past donations. The value of cash donations decreased, and exposed foundations reduced philanthropic expenses. These results suggest foundation resources are extracted to benefit controlling shareholders, undermining donation value for minority shareholders.