What Makes Firms Overgenerous in Giving Charitable Contributions?: Evidence from Korea

Using secret tax return data, this study investigates the determinants of a firm’s overgenerous charitable contributions above tax deduction limit in Korea. The regression results with the fixed-effect Probit and the Order Probit model support the expectations made from relevant studies. Profitability, the marginal tax rate and the change in dividend payments affect the happening and its frequency of the firm’s overgenerosity positively, while the level of public relations activity, leverage, ownership concentration and wage expenses affect them negatively. The regression results with the fixed-effect Heckit model are similar. Interestingly, the explanatory power of the marginal tax rate is highly significant in the Probit model and the Ordered Probit model, while that becomes insignificant in the Heckit model, which implies that the manager have, though inaccurate, rough premonition of tax undeductibility of excessive charitable contributions.