Tuesday, April 8, 2008
More on Nefarious, "Guilt-Free" Motives for Giving and the Complexity of Private Foundation Excise Taxes
David Yermak recently posted "Deductions Ad Absurdum: CEO's Donating Their own Stock to their Own Family Foundations." Here is the abstract:
I study large charitable gifts by Chairmen and CEOs of public companies using their own company stock as the donation currency. Unlike open market sales, gifts of stock are not subject to insider trading law and have very lenient disclosure requirements. Consistent with their exemption from insider trading law, I find that CEOs' stock gifts occur just prior to significant drops in their firms' stock prices, a pattern that enables the donors to obtain increased personal income tax benefits. This timing is more pronounced when executives donate their own shares to their own family foundations, which I identify using foundations' IRS tax returns posted on Internet databases. Stock gifts are also strategically timed to occur prior to unfavorable quarterly earnings announcements and after positive earnings announcements. Evidence related to reporting delays and seasonal patterns suggests that some CEOs backdate stock gifts to their own family foundations in order to increase personal tax benefits. CEOs' family foundations hold donated stock for long periods rather than diversifying, permitting CEOs to continue voting the shares but violating standard prudent investor principles of risk reduction through diversification. These results highlight an odd juxtaposition of motives, suggesting that while making charitable contributions to support good works in society, CEOs use aggressive and perhaps fraudulent tax evasion strategies.
Here is another one of my "gratuitous remarks." I keep trying to make the case that the overly detailed private foundation excise taxes (like IRC 4943 relating to excess business holdings) are an unnecessary intrusion on the free market and the good motives but then research like this makes me wonder whether the market is free and the motives good? At least the article proves that some donors are totally without guilt, as a few readers have suggested. Actually, those who take apparent offense to my association of giving with anything but real altruism may be right that guilt does not motivate giving, at least not amongst the very wealthy. Here is what Yermak surmises regarding the motives for giving:
In giving away part of their wealth, executives respond to a wide range of motives (Auten, Clotfelter, and Schmalbeck, 2000). In addition to the psychic value of altruism, somedonors seek public recognition both for themselves (Harbaugh, 1988) and their companies. Other donors use charitable contributions to achieve membership in elite social circles such as prestigious non-profit boards, which may provide not only public visibility but also access to lucrative business relationships.5 More prosaically, philanthropic decisions also depend upon income tax incentives, estate planning considerations, disclosure requirements, and even aspects of corporate voting and control. While finance research has closely studied how CEOs dispose of stock via sale (insider trading), exchange (mergers and acquisitions), and intergenerational bequest (family business groups), our knowledge about CEOs’ stock gifts is limited to two recent working papers by Johnson and Moorman (2005) and Jung and Park (2007). Johnson and Moorman (2005) study a large sample of stock gifts by CEOs of U.S. companies between 1989 and 2003. Consistent with the results below, the authors find evidence of opportunistic gift timing near local stock price maximum points, suggesting that donor CEOs use private information to increase personal income tax benefits. They do not, however, identify the recipients of individual gifts, study the role of family foundations, or consider the hypothesis that some gifts might be fraudulently backdated. Jung and Park (2007) study transfers of stock by controlling shareholders of South Korean companies to other family members. In Korea such transfers create gift tax liability based upon the average value of the shares over a certain time interval around the gift. The paper’s results suggest that companies depress their stock prices around the dates of these transfers by disclosing bad news and withholding good news from the market in order to reduce the donor CEOs’ gift taxes.
Don't get it twisted. Guilt [not greed], my friends, is good. As I've mentioned to at least one reader who has taken umbrage regarding my attribution of giving to guilt, the poor givers amongst us -- those who occasionally give to panhandlers or drop a few coins in the Salvation Army bucket around Christmas are acting out of guilt. Its hard to just walk right by without giving anything and rarely is it that we are giving out of the goodness of our hearts. And indeed, we ought to be guilty. What with most of the world starving and here we are living in the lap of luxury -- buying all kinds of junk for Christmas (my wife and I do it ourselves)!