Insiders’ personal stock donations from the lens of stakeholder, stewardship and agency theories Sudip Ghosh 1 and Maretno A. Harjoto 2 1. Division of Engineering, Business, and Computing, Penn State University, Reading, PA, USA 2. Graziadio School of Business and Management, Pepperdine University, Malibu, CA, USA This paper studies the relationship between personal stock donation by top executives and board of directors (insiders) of publicly traded corporations and their personal tax, shareholders’ returns, and social responsibility. The study finds evidence that the timing of stock donations is driven by personal tax gain. The study further shows, comparing stock gift corporations relative to their non-stock gift cohorts, that personal stock gifts are associated with lower short-term and long-term stock returns to shareholders. This implies that stock donation driven by insiders’ personal gain adversely affects shareholder wealth. However, the likelihood and intensity of insiders to make personal stock donation is reduced when firms have strong corporate social responsibility (CSR). Agency theory explains insiders’ opportunistic behavior, stakeholder theory is also supported by evidence that stock donation is negatively related to CSR, and stewardship theory offers a different view to explain the rationale behind insiders’ stock donation and shareholders’ reactions to stock gifts. Introduction Since 2000, the corporation as the most popular form of business organization has been marred by corporate scandals, accounting frauds, investment frauds, and excessive risk taking led by their insiders (top executives and directors). Examples include Enron, WorldCom, Tyco, Adelphia, and Country- wide Financial. In recent years, the proliferation of abusive personal tax sheltering behavior by corpo- rate insiders has come under increased scrutiny, both in academia and in practice, with heightened concerns over the spread of tax avoidance in more creative ways. We are interested in one such tax avoidance method: stock gifts by US top executives and board of directors (insiders). Yermack (2009) shows evidence that CEOs backdated their stock donations to their own charitable foundations to gain personal income tax deductions. For many charities, a large portion of their endowment comes from stock gifts made by CEOs and directors. Unlike open market sales, personal stock gifts are not subject to insider trading law. Top executives can often make stock gifts to charities during company ‘blackout’ periods (Bettis et al. 2000). This provides executives with an opportunity to enjoy pecuniary benefits in two different ways. First, the managers obtain a personal income tax deduction by timing their donations. Second, it allows the donors to offset their personal capital gains tax if they sold the shares at a premium in lieu of donation. Thus, in recent years, insiders’ stock gifts have become quite contentious. The availability of data on bona fide stock gifts (Form 4 and Form 5 r 2011 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA doi: 10.1111/j.1467-8608.2011.01633.x 342 Business Ethics: A European Review Volume 20 Number 4 October 2011