Nber Working Paper Series Financial Constraints on Corporate Goodness Harrison Hong Jeffrey D. Kubik Jose A. Scheinkman

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NBER WORKING PAPER SERIES

FINANCIAL CONSTRAINTS ON CORPORATE GOODNESS
Harrison Hong
Jeffrey D. Kubik
Jose A. Scheinkman
Working Paper 18476
http://www.nber.org/papers/w18476

NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
October 2012

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.

NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

© 2012 by Harrison Hong, Jeffrey D. Kubik, and Jose A. Scheinkman. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

Financial Constraints on Corporate Goodness
Harrison Hong, Jeffrey D. Kubik, and Jose A. Scheinkman
NBER Working Paper No. 18476
October 2012
JEL No. G30,G32,G39
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.

Harrison Hong
Department of Economics
Princeton University
26 Prospect Avenue
Princeton, NJ 08540
and NBER
hhong@princeton.edu
Jeffrey D. Kubik
Maxwell School
Syracuse University
426 Eggers Hall
Syracuse, NY 13244
jdkubik@maxwell.syr.edu

Jose A. Scheinkman
Department of Economics
Princeton University
Princeton, NJ 08544-1021
and NBER
joses@princeton.edu

1.

Introduction

Many firms, especially large corporations, annually invest significant resources on corporate social responsibility practices such as cleaner environmental technology, employee and community development programs and philanthropic endeavors. In 2009, Intel allocated $100 million for global education programs and energy conservation efforts such as the purchase of renewable energy certificates. In 2007, General Electric gave $160 million to community and employee philanthropic programs and earmarked billions more for developing eco-friendly products. Most famously, Google in the mid-2000s initiated a 1% project that would take 1% of its profits and invest it in socially responsible projects that had both philanthropic and profit interests.1 Moreover, many corporations increasingly use evaluation systems and compensation programs that include the social performance of firms (see, e.g., Kaplan and Norton (1996)).

There is a large management literature going back many years that examines the relationship between corporate social responsibility and financial performance. It has focused on why such practices might be positive net present value (NPV) similar to standard forms of corporate investments like capital expenditures or research and development (R&D). Many theories have been...
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