Financial Constraints on Corporate Goodness ∗

An influential thesis, dubbed “Doing Well by Doing Good”, argues that corporate social responsibility is profitable. We establish that, if anything, the reverse is true: firms do good only when they do well in the sense of having financial slack. We model a firm’s optimal choices of capital and goodness subject to financial constraints. Lessconstrained firms spend more on goodness. We verify that in the data less constrained firms indeed have higher goodness scores and establish causality by using a quasiexperiment. 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. ∗Hong and Scheinkman acknowledge support from the National Science Foundation through grants SES0850404 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 for helpful comments. †Princeton University and NBER (e-mail: [email protected]) ‡Syracuse University (e-mail: [email protected]) §Princeton University and NBER (e-mail: [email protected])