Kubik study on financial constraints on corporate goodness published
Apr 25, 2012
Financial Constraints on Corporate Goodness
Harrison G. Hong, Jeffrey D. Kubik & José Scheinkman
April 2012
An influential thesis, dubbed "Doing Well by Doing Good", argues that corporate social responsibility is profitable. The authors establish that, if anything, the reverse is true: firms do good only when they do well in the sense of having financial slack. The authors model a firm's optimal choices of capital and goodness subject to financial constraints. Less-constrained firms spend more on goodness. They verify that in the data less constrained firms indeed have higher goodness scores and establish causality by using a quasi-experiment. During the Internet bubble, previously constrained firms experienced a temporary relaxation of their constraints and their goodness also temporarily increased relative to their previously unconstrained peers. Goodness is also more sensitive to financial constraints than capital or R\&D spending.