Nber Working Paper Series Financial Constraints on Corporate Goodness Harrison Hong Jeffrey D. Kubik Jose A. Scheinkman
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
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
References: Andreoni, J., 1989, “Giving with Impure Altruism: Applications to Charity and Ricardian Equivalence,” Journal of Political Economy, 97(1), 1447–1458. Baker, M., J. C. Stein, and J. Wurgler, 2003, “When Does The Market Matter? Stock Prices And The Investment Of Equity-Dependent Firms,” The Quarterly Journal of Economics, Baron, D. P., 2001, “Private Politics, Corporate Social Responsibility, and Integrated Strategy,” Journal of Economics & Management Strategy, 10(1), 7–45. Becker, G., 1974, “A Theory of Social Interaction,” Journal of Political Economy, 82, 1063– 1093. Benabou, R., and J. Tirole, 2010, “Individual and Corporate Social Responsibility,” Economica, 77, 1–19. Besley, T., and M. Ghatak, 2005, “Competition and Incentives with Motivated Agents,” American Economic Review, 95(3), 616–636. Campello, M., and J. Graham, 2007, “Do Stock Prices Influence Corporate Decisions? Evidence from the Technology Bubble,” Nber working papers, National Bureau of Economic Research, Inc. Cheng, I.-H., H. Hong, and K. Shue, 2012, “Do Managers Do Good with Other Peoples’ Money?,” working paper, Princeton Universoty. Delevingne, L., 2009, “Surprising Survivors: Corporate Do-Gooders,” CNNMoney.com. DiGuili, A., and L. Kostovetsky, 2012, “Are Red or Blue Companies More Likely to Go Green? Politics and Corporate Social Responsibility,” Working papers, University of 28 Friedman, M., 1970, “The Social Responsibility of Business Is To Increase Its Profits,” New Heal, G., 2005, “Corporate Social Responsibility—Economic and Financial Perspectives,” Geneva Papers, 30, 387–409. Heinkel, R., A. Kraus, and J. Zechner, 2001, “The Effect of Green Investment on Corporate Behavior,” Journal of Financial and Quantitative Analysis, 36(04), 431–449. Hong, H., and M. Kacperczyk, 2009, “The price of sin: The effects of social norms on markets,” Journal of Financial Economics, 93(1), 15–36. Hong, H., and L. Kostovetsky, 2009, “Red and Blue Investing: Values and Finance,” forthcoming Journal of Financial Economics. Kaplan, R. S., and D. P. Norton, 1996, “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review, January-February. Kaplan, S. N., and L. Zingales, 1997, “Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints,” The Quarterly Journal of Economics, 112(1), 169– Margolis, J., H. Elfenbein, and J. Walsh, 2007, “Does It Pay To be Good? A Meta-Analysis and Redirection of the Relationship between Corporate Social and Financial Performance,” Pastor, L., and P. Veronesi, 2006, “Was there a Nasdaq bubble in the late 1990s?,” Journal of Financial Economics, 81(1), 61–100. Tirole, J., 2001, “Corporate Governance,” Econometrica, 69(1), 1–35.