Financial Constraints on Corporate Goodness

48 Pages Posted: 20 Oct 2012 Last revised: 25 Oct 2012

See all articles by Harrison G. Hong

Harrison G. Hong

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

Jeffrey D. Kubik

Syracuse University - Department of Economics

José Scheinkman

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

Multiple version iconThere are 3 versions of this paper

Date Written: October 2012

Abstract

An influential thesis, dubbed "Doing well by doing good," argues that corporate social responsibility is profitable. But heterogeneity in firm financial constraints can induce a spurious correlation between profits and goodness even if the motives for goodness are non-profit in nature. We use two identification strategies to show that financial constraints are indeed an important driver of corporate goodness. First, during the Internet bubble, previously constrained firms experienced a temporary relaxation of their constraints and their goodness temporarily increased relative to their previously unconstrained peers. Second, a constrained firm's sustainability score increases more with its idiosyncratic equity valuation and lower cost of capital than a less-constrained counterpart. In sum, firms are more likely to do good when they do well.

Suggested Citation

Hong, Harrison G. and Kubik, Jeffrey D. and Scheinkman, José, Financial Constraints on Corporate Goodness (October 2012). NBER Working Paper No. w18476. Available at SSRN: https://ssrn.com/abstract=2164600

Harrison G. Hong (Contact Author)

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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Jeffrey D. Kubik

Syracuse University - Department of Economics ( email )

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315-443-1081 (Fax)

José Scheinkman

Columbia University ( email )

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Princeton University - Department of Economics ( email )

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HOME PAGE: http://www.princeton.edu/~joses

National Bureau of Economic Research (NBER)

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