Financial Constraints on Corporate Goodness
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.
Hong and Scheinkman acknowledge support from the National Science Foundation through grants SES-0850404 and SES-07-18407. We thank Joshua Margolis, Dirk Jenter, Jeffrey Wurgler and seminar participants at St Gallen, Shanghai Advanced Institude of Finance, NBER Corporate Finance Summer Institute, Swedish Institute for Financial Research, and AFA Meetings helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.