Superior Corporate Social Performance and Financial Constraints: The Case of Japan

The value creation of firms via engaging in better corporate social performance is an inconclusive area as well as is scarcely researched especially in the context of Japan. In this study, we examine whether the engagement in a higher degree of corporate social performance will reduce financial constraints. The findings show that overall, a higher degree of corporate social performance is negatively associated with financial constraints. The study also indicates that the financially distressed firms tend to engage in higher corporate social performance, and thereby lower their financial constraints. On the other hand, for the financially unconstrained firms, although we expected that engagement in a higher degree of corporate social performance does not reduce the investment-cash flow sensitivity, we find an unexpected negative relationship. This we attribute to the fact that such firms are faced with obtaining debt at higher costs, and therefore may need to rely on equity financing, which is more expensive or/and restrictive.