Why Do Socially Responsible Firms Pay More Dividends?

Abstract

Using a sample of 22,389 US firm-year observations over the period from 1991 to 2012, we find that high CSR firms pay more dividends than low CSR firms. This is consistent with our expectation that socially responsible firms may use the dividend policy to manage the agency problems related to overinvestment in CSR. The analysis of individual components of CSR provides strong support for this main finding: five of the six dimensions used in the analysis are also associated with high dividend payout, namely, corporate governance, community, diversity, employee relations, environment. Furthermore, by analyzing the stability of dividend payout, we find that socially irresponsible firms adjust dividends quicker than do socially responsible firms: dividend payout is more stable in high CSR firms than in low CSR firms. Additional results show that firms involved in two controversial activities: military and alcohol are associated with low dividend payout which is likely due to the high cost of external funding for these firms as highlighted by Goss and Roberts (2011). Our findings are robust to alternative assumptions and model specifications, alternative measures of dividend payout, additional control variables, and several approaches to address endogeneity and selection bias issues.Keywords: Corporate social responsibility, dividend policy, agency theory JEL classification: G32, M14 *PhD Candidate in Finance -Grenoble University -CERAG UMR CNRS 5820 -BP 47, 38040 Grenoble Cedex 9, France -Mohammed.benlemlih@upmf-grenoble.fr. 2 Why do socially responsible firms pay more dividends?Abstract Using a sample of 22,389 US firm-year observations over the period from 1991 to 2012, we find that high CSR firms pay more dividends than low CSR firms. This is consistent with our expectation that socially responsible firms may use the dividend policy to manage the agency problems related to overinvestment in CSR. The analysis of individual components of CSR provides strong support for this main finding: five of the six dimensions used in the analysis are also associated with high dividend payout, namely, corporate governance, community, diversity, employee relations, environment. Furthermore, by analyzing the stability of dividend payout, we find that socially irresponsible firms adjust dividends quicker than do socially responsible firms: dividend payout is more stable in high CSR firms than in low CSR firms. Additional results show that firms involved in two controversial activities: military and alcohol are associated with low dividend payout which is likely due to the high cost of external funding for these firms as highlighted by Goss and Roberts (2011). Our findings are robust to alternative assumptions and model specifications, alternative measures of dividend payout, additional control variables, and several approaches to address endogeneity and selection bias issues.

Corporate social responsibility and the wealth gains from dividend increases

“…This paper relates CSR investments to shareholder wealth gains from dividend changes. While there is earlier work that looks at associations between CSR and the amount of dividends that a firm pays out (see Benlemlih, ; Rakotomavo, ), this paper takes a different approach by looking at the announcement returns around dividend increases and the subsequent change in operating performance. We posit that dividend increases by high‐CSR and low‐CSR firms convey asymmetrical information to investors about firm profitability, thereby eliciting disparate wealth effects.…”

“…In a recent study, Benlemlih () purports that socially responsible firms may use dividend policy to manage the agency problems related to overinvestment in CSR activities. He finds that high‐CSR firms tend to pay more regular cash dividends than low‐CSR firms, and that dividend payout is more stable in high‐CSR firms.…”

Corporate life cycle, CSR, and dividend policy: empirical evidence of Indonesian listed firms

“…To the best of the authors’ knowledge, there is thin literature investigating the relation between corporate life cycle, CSR, and dividend policy in emerging markets while it is important as it could encourage companies to integrate CSR into their business strategy and transparently disclose their CSR activities. Further, as previous research on these topics mainly conducted using the US data (Rakotomavo, 2012; Benlemlih, 2014; Hasan and Habib, 2017), which most of CSR disclosures are voluntary, this paper contributes to the existing literature by examining these topics in a country where CSR is mandatory by the law.…”

“…Benlemlih (2014) examines the importance of dividend policy, using a large sample of 3,040 US firms between 1991 and 2012 covered by KLD, to control CSR’s overinvestment problems due to agency issues in socially responsible firms. He then develops model using the set of control variables that commonly used in prior studies on dividend policy (Fama and French, 2001) to better isolate the impact of CSR variables.…”

“…Van Beurden and Gossling (2008) also generally conclude the same results by reviewing 24 studies using meta-data analysis. Recently, the literature on CSR focuses not only on the CSR and CFP link but also to another relevant topics in corporate finance, such as the link between CSP and the cost of capital (El Ghoul et al , 2010; Cajias et al , 2014), the connection between CSR and information asymmetry (Dhaliwal et al , 2011; Lu and Chueh, 2015), the relationship between CSR investments and dividend policy (Rakotomavo, 2012; Benlemlih, 2014) and also the link between CSR and corporate life cycle (Hasan and Habib, 2017).…”