Giving large chunks of change to charity is one of the only things filthy-rich CEOs can do to get a bit of credit from working-class stiffs. But as new research indicates, even these generous handouts may often be tainted by greed.
By focusing on 151 gifts of at least $1 million in stock from top executives to their family foundations, David Yermack, a finance professor at New York University, discovered that many bosses have a knack for timing donations when their company’s stock is peaking—which is perfect for maximizing their income tax break.
He offers two troublesome explanations for how this might occur: insider knowledge and backdating. In the first instance, a CEO could time a gift—before or after results are made public—to ensure the donation is made when the company’s stock is at a high. Yermack found that 15 of 18 gifts that came soon after results were released followed good news. And of the five donations made right before an earnings announcement, four preceded bad news and a sharp drop in the share price. Currently, insider trading laws aren’t enforced on gifts, he says, providing a huge tax loophole. Backdating, he says, is possible since charitable gifts, unlike the selling of stock, don’t have to be reported immediately. Therefore, accountants have plenty of opportunity to be creative with dates. Who’s to say exactly when that gift was made?
The widespread option backdating scandal involving executives a couple of years
ago makes him skeptical that philanthropydonations to family foundations and other charities—is totally free of it. Yermack, who hopes his research will help change rules of disclosure relating to charitable giving, has notified the Securities and Exchange Commission of his findings. “The chance that this is all coincidence,” says Yermack, “is around 50 to one.” M
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