Financial Constraints on Corporate Goodness

44 Pages Posted: 14 Mar 2011

See all articles by Jeffrey D. Kubik

Jeffrey D. Kubik

Syracuse University - Department of Economics

José A. Scheinkman

Columbia University; Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: January 3, 2011

Abstract

We model the firm's optimal choice of capital and goodness subject to financial constraints. Managers and shareholders derive benefits over profits and social responsibility. Goodness is costly and its marginal benefit is finite; as a result, less-constrained firms spend more on goodness. We verify that less-constrained firms do indeed have higher social responsibility scores. Our empirical analysis addresses identification issues that have long plagued the corporate social responsibility literature, establishing the causality of this relationship using a natural experiment. During the technology bubble, previously constrained firms experienced a temporary relaxation of their constraints and their goodness scores also temporarily increased relative to their previously unconstrained peers. This temporary convergence applies to all components of the goodness scores such as community and employee relations and environmental responsibility but not governance.

Keywords: Corporate Social Responsibility, Socially Responsible Investing, Financial Constraints, Financial Slack, Externalities, Public Goods

JEL Classification: G30, H40, L20

Suggested Citation

Kubik, Jeffrey D. and Scheinkman, José and Hong, Harrison G., Financial Constraints on Corporate Goodness (January 3, 2011). AFA 2012 Chicago Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1784357 or http://dx.doi.org/10.2139/ssrn.1784357

Jeffrey D. Kubik (Contact Author)

Syracuse University - Department of Economics ( email )

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José Scheinkman

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Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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United States

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