Access to Finance and Corporate Social Responsibility: Evidence from a Quasi-Natural Experiment

We provide causal evidence that investments into Corporate Social Responsibility (CSR) are affected by firms’ prior financial performance. More precisely we argue and test for a causal link between changes in firms’ cost of internal financing and CSR. To establish causality, we make use of the exogenous variation in firm-level financial constraints induced by the passage of the American Jobs Creation Act (AJCA) of 2004. We further examine the sensitivity of CSR investments to the level of financial constraints firms faced in the period prior to passage of the AJCA. We test our hypotheses with a data-set of the largest U.S. firms between 2001 and 2007. Results provide causal evidence that firm financial performance drives CSR investments. Further, we show that the impact of the Act varies based on firms’ prior level of financial constraints in an interesting way.