Financial Constraints on Corporate Goodness

Harrison Hong, Jeffrey D. Kubik, Jose A. Scheinkman

NBER Working Paper No. 18476
Issued in October 2012
NBER Program(s):   CF

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.

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Document Object Identifier (DOI): 10.3386/w18476

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