Do financial constraints matter when firms engage in CSR?

Chia Ying Chan, De Wai Chou*, Huai Chun Lo

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

73 Citations (Scopus)


Studies in corporate social responsibility find that financial performance (ROA and ROE) is associated with the corporate social performance (CSP). Margolis et al. (2007) observed that “the mechanisms connecting prior corporate financial performance (CFP) to subsequent CSP” is an important issue for further investigation. In this study, we examine whether different states of cash flow liquidity impact the extent of a firm's corporate social responsibility (CSR) activities. If firms perform well in CSP, we assume they have greater cash flow liquidity as measured by the KZ index and Altman's Z-score. We posit that firm engagement in CSR is negatively linked with financial constraint dummies, which are computed as above 20% on the KZ index, or an Altman's Z-score below 1.81. In this study, we compute the ratio of CSR strengths to concerns for each firm, which allows us to assign a specific CSR ‘Focus’ for each sample firm. Based on data from MSCI ESG STATS ratings, all firms are divided into seven focuses: an Environment Focus (ENV), a Community (COM) Focus, an Employee (EMP) Focus, a Diversity (DIV) Focus, a Product (PRO) Focus, a Governance (CGOV) Focus and a Human Rights (HUM) Focus. Furthermore, a multiple logit regression is conducted based on these seven focuses to examine the impact of financial constraints/liquidity proxies on firms with different CSR focuses. Our results confirm a significant negative association between CSR activities and the degree of financial constraints/distress. Our finding confirms the view of Campbell (2007). For the CSR focuses, we find that in general firms facing financial constraints do not engage in any CSR activities, especially when the degree of financial constraints is assessed by the KZ index. Our findings are robust using various CSR measures and financial constraint measures, and potentially useful to market participants when making investment decisions. Our findings also provide greater understanding of the characteristics of CSR firms.

Original languageEnglish
Pages (from-to)241-259
Number of pages19
JournalNorth American Journal of Economics and Finance
Publication statusPublished - 2017 Jan 1


  • Altman Z-score
  • Corporate social responsibility
  • Financial constraints
  • KZ index

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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