Financial Constraints on Corporate Goodness
Harrison G. Hong
Princeton University - Department of Economics; National Bureau of Economic Research (NBER)
Jeffrey D. Kubik
Syracuse University - Department of Economics
Jose A. Scheinkman
Columbia University; Princeton University - Department of Economics; National Bureau of Economic Research (NBER)
February 2, 2012
An influential thesis, dubbed "Doing Well by Doing Good", argues that corporate social responsibility is profitable. We establish that, if anything, the reverse is true: firms do good only when they do well in the sense of having financial slack. We model a firm's optimal choices of capital and goodness subject to financial constraints. Less-constrained firms spend more on goodness. We verify that in the data less constrained firms indeed have higher goodness scores and establish causality by using a quasi-experiment. During the Internet bubble, previously constrained firms experienced a temporary relaxation of their constraints and their goodness also temporarily increased relative to their previously unconstrained peers. Goodness is also more sensitive to financial constraints than capital or R\&D spending.
Number of Pages in PDF File: 49
Keywords: Corporate Social Responsibility, Socially Responsible Investing, Financial Constraints, Financial Slack, Externalities, Public Goods
JEL Classification: G30, H40, L20
Date posted: January 4, 2011 ; Last revised: April 26, 2012
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