Firms that feel flush are more likely to engage in corporate social responsibility, according to a new National Bureau of Economic Research working paper. In their October study “Financial Constraints on Corporate Goodness,” economists Harrison Hong and Jose A. Scheinkman of Princeton University and Jeffrey D. Kubik of Syracuse University challenge the growing consensus that corporations can boost profits through environmental programs, philanthropic giving, or community building.
Comparing the behavior of firms before the dot-com bubble of the early 2000s with their choices mid-bubble, Hong and his colleagues found that when companies experienced an influx of cash or otherwise became less financially constrained, they were more likely to engage in socially responsible practices. The economists also looked at idiosyncratic variations between firms. In both scenarios, they found that corporate social responsibility was more sensitive to increased financial slack than other spending decisions, such as R&D and capital investment. The authors conclude that “firms are more likely to do good when they do well.”