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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

Jeffrey D. Kubik

Jeffrey D. Kubik

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.