Financial Constraints on Corporate Goodness

Abstract:     
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

working papers series