Which Firm Should We Save During COVID-19, Distressed Firms or Socially-Responsible Firms?

37 Pages Posted: 11 Oct 2020 Last revised: 9 Sep 2021

See all articles by Fangzhou Lu

Fangzhou Lu

The University of Hong Kong - Department of Finance; Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: August 29, 2021

Abstract

What kind of firms should be saved by the government during an economic downtown? Previous research indicates that firms with growth potential instead of zombie firms should be saved, and firms that are most distressed should be subsidized. This paper provides a new perspective and suggests that socially responsible firms that care about stakeholders should be saved. During an economic downtown, firms stop hiring regardless of their financial strength and act cautiously, but firms that care about their stakeholders lay off fewer employees and keep hiring. For a one standard deviation increase in the percentage of population donated to a charity, the aggregate job posting number from the firms in that county increases by 13% during the COVID-19 period. At the firm level, I show that for a one standard deviation increase in a firm's CSR community score which mainly measures a firm's donation level, a firm's job posting growth is 5% higher, 2.7% less likely to announce a massive layoff plan and 3.5% less likely to announce a hiring freeze policy. Unlike the previous literature regarding COVID-19 and unemployment which suggests that the Paycheck Protection Program (PPP) does not work, I show that the PPP has significantly increased new job postings but only in counties with a high level of altruism. These results suggest that fiscal stimulus such as the PPP should target firms with good track records of corporate social responsibility performance.

Keywords: COVID-19, Corporate Social Responsibility, Paycheck Protection Program

JEL Classification: J21, E62

Suggested Citation

Lu, Fangzhou, Which Firm Should We Save During COVID-19, Distressed Firms or Socially-Responsible Firms? (August 29, 2021). Available at SSRN: https://ssrn.com/abstract=3705473 or http://dx.doi.org/10.2139/ssrn.3705473

Fangzhou Lu (Contact Author)

The University of Hong Kong - Department of Finance ( email )

Pokfulam
Hong Kong

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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