Corporate social responsibility and dividend policy

Using a sample of 22,839 US firm-year observations over the 1991–2012 period, we find that high CSR firms pay more dividends than low CSR firms. The analysis of individual components of CSR provides strong support for this main finding: five of the six individual dimensions are also associated with high dividend payout. When analyzing the stability of dividend payout, our results show that socially irresponsible firms adjust dividends more rapidly than socially responsible firms do: dividend payout is more stable in high CSR firms. These findings are robust to alternative assumptions and model specifications, alternative measures of dividend, additional control, and several approaches to address endogeneity. Overall, our results are consistent with the expectation that high CSR firms may use dividend policy to manage the agency problems related to overinvestment in CSR.     

Corporate social responsibility and dividend policy

This study outlines and tests two corporate social responsibility (CSR) views of dividends. The first view argues that firms are likely to pay fewer dividends because CSR activities lower the cost of equity, encouraging firms to invest or hoard cash rather than to pay dividends. The second view suggests that CSR activities are positive NPV projects that increases earnings and hence dividend payouts. The first (second) view predicts that firms with a stronger involvement in CSR activities should be associated with a lower (higher) dividend payouts. The finding supports the second view and is robust.     

Cross-listing and corporate social responsibility

This paper investigates the dynamics of cross-listing and corporate social responsibility (CSR). Using a sample of 10,815 firm-year observations from 54 countries over the period 2002–2011, we find that cross-listed firms have better CSR performance than non–cross-listed domestic firms. This result is robust to endogeneity and different types of cross-listing. We also find that CSR increases (decreases) significantly after cross-listing in (delisting from) U.S. markets. The positive impact of cross-listing on CSR performance is stronger for firms from countries with weaker institutions, lower country-level sustainability, and higher liability of foreignness, and for firms operating in industries with high litigation risk. Finally, we find that cross-listed firms with better CSR performance exhibit higher valuations.     

Forced Versus Voluntary Dividend Reduction: An Agency Cost Explanation

We examine whether the agency cost arising from shareholder‐bondholder conflict is an important determinant of the timing of dividend reduction decisions. Firms forced to reduce dividends owing to bond covenant violations experience lower earnings, more frequent losses, and greater earnings declines around the dividend reduction year than do firms that voluntarily reduce dividends. Relative to voluntary‐reduction firms, forced‐reduction firms have higher debt‐to‐equity ratios and managerial holdings. These findings coupled with the increased dividend payout ratios and lower announcement period returns suggest that financially distressed firms that anticipate poor performance have greater incentives to delay reducing dividends to avoid a wealth transfer to bondholders.     

Dividend payouts and catering to demands: Evidence from a dividend tax reform

Utilizing the 2012 dividend tax reform in China, this paper examines how firms make dividend payout decisions that cater to the controlling shareholders' demand, especially when controlling shareholders and outside minority shareholders have different dividend preferences. We find that firms increase dividend payouts when controlling shareholders demand higher dividends after the dividend tax reform. In particular, firms pay higher dividends when facing increased demand from controlling shareholders than when the demand is from minority investors. In addition, we find that firms that increase dividend payments due to the controlling shareholders' demand subsequently have more debt financing and poorer firm performance, suggesting that catering to the demands from controlling shareholders is subject to the Type II agency problem.     

Does corporate social responsibility affect auditor-client contracting? Evidence from auditor selection and audit fees

We find that firms with higher CSR performance are more likely to choose Big N auditors and less likely to switch to non-Big N auditors, consistent with socially responsible firms demanding higher audit quality. Furthermore, we provide robust evidence that firms with higher CSR performance pay lower audit fees using both levels and changes models, suggesting that higher CSR performance reduces auditor engagement risk. Our analysis based on the difference-in-differences approach indicates that it is higher CSR performance that leads to lower audit fees, not vice versa. Overall, the results highlight the important role of CSR performance in auditor-client contracting.     

Board Connections and Dividend Policy

We examine the role of firm board connectedness in shaping a firm's dividend policy. We show that firms with well-connected boards not only have a higher likelihood of paying dividends in the pooled sample of both dividend payers and non-payers but also pay more dividends in the sample of dividend payers, compared with those with poorly connected boards. Further analysis reveals that the relation between board connectedness and dividend-paying behaviour tends to be economically stronger in firms pre-identified to have more severe agency conflicts, suggesting that well-connected boards tend to use dividends to mitigate agency problems in these firms. These findings are robust to different measures of board connectedness, different dividend payout measures, alternative estimation methods, and tests that account for endogeneity.     

Cross-border mergers and acquisitions and corporate social responsibility: Evidence from Chinese listed firms

This study examines the impact of cross-border mergers and acquisitions (M&As) on acquirers’ corporate social responsibility (CSR). Based on a sample of Chinese listed firms, we find that firms with cross-border M&A activities experience an improvement in subsequent CSR performance. Specifically, the CSR rating is approximately 8.24% higher in firms with cross-border M&As than in those without such activities. We also find that this positive influence is more pronounced in firms with low initial CSR ratings than in those with high initial CSR ratings at the time when a cross-border M&A deal is completed. Additional analyses reveal that this positive effect is mainly driven by the target firms from countries with high social preference relative to China and that the enhancement in CSR driven by cross-border M&As translates into higher operating performance and easier access to finance. Overall, our findings demonstrate that cross-border M&As can serve as a critical channel for acquirers from a country with low institutional quality to build a better reputation through environmentally friendly behaviour and socially responsible engagement, and therefore gain capital market benefits.     

THE DIVIDEND PAYOUTS OF PRIVATE FIRMS: EVIDENCE FROM TAX COURT DECISIONS

To study the dividend payouts of private firms we extend the agency cost/external financing cost trade-off model of dividend payouts to include the accumulated earnings tax (AET). The firm's optimal dividend policy trades off the benefits from lower agency costs against external financing costs and the AET. Information from tax court records reveals that private firms' payouts are influenced by both agency costs and the AET.     

Incentive Compensation and the Stock Price Response to Dividend Increase Announcements

Linking executive compensation to stock price performance is predicted to decrease the usual positive price response to dividend increases for two reasons. One, increasing pay‐performance sensitivity (PPS) exacerbates managers' optimistic bias regarding future firm performance, reducing the credibility of dividend signals. Two, increasing pay‐performance sensitivity reduces the need for dividends as a means of reducing agency costs. Consistent with behavioral and agency theories of corporate finance, we find that price response does decrease as pay‐performance sensitivity increases and that this effect is concentrated in firms with low market‐to‐book ratios. Additional findings are most consistent with the agency cost explanation.     

The role of cross-listing,foreign ownership and state ownership in dividend policy in an emerging market

In this paper, we investigate if dividend policy is influenced by ownership type. Within the dividend literature, dividends have a signaling role regarding agency costs, such that dividends may diminish insider conflicts (reduce free cash flow) or may be used to extract cash from firms (tunneling effect) – which could be predominant in emerging markets. We expect firms with foreign ownership and those that are listed in overseas markets to have different dividend policies and practices than those that are not, and firms with more state ownership and less individual ownership to be more likely to pay cash dividends and less likely to pay stock dividends. Using firms from an emerging economy (China), we examine whether these effects exist in corporate dividend policy and practice. We find that both foreign ownership and cross-listing have significant negative effects on cash dividends, consistent with the signaling effect and the notion of reduced tunneling activities for firms with the ability to raise capital from outside of China. Consistent with the tunneling effect, we find that firms with higher state ownership tend to pay higher cash dividends and lower stock dividends, while the opposite is true for public (individual) ownership. Further analysis shows that foreign ownership mediates the effect of state ownership on dividend policy. Our results have significant implications for researchers, investors, policy makers and regulators in emerging markets.     

Mandatory CSR disclosure,monitoring and investment efficiency: evidence from China

This study investigates the effect of mandatory corporate social responsibility (CSR) disclosure on firms’ investment efficiency in China. Using the CSR regulation that mandates a group of listed firms to disclose stand‐alone CSR reports after 2008 as a natural experiment, we find that firms subject to the mandatory CSR regulation have decreased investment inefficiency subsequent to the mandate, especially in cases of overinvestment. This effect is more pronounced for firms with a control‐ownership wedge, state‐owned enterprises (SOEs), and firms having lower institutional ownership. Further analyses find that the reduction of overinvestment is much more significant in industries with high pollution and that the reduction in investment is not due to the CSR spending siphoning off capital used in other projects. We argue that mandatory corporate social responsibility disclosure improves monitoring over firms in China, especially when firms are characterised as having severe agency problems.     

Stakeholder conflicts and dividend policy

This paper compares the dividend policy of owner-controlled firms with that of firms where the owners are a minority relative to non-owner employees, customers, and community citizens. We find that regardless of whether owners or non-owners control the firm, the strong stakeholder uses the dividend payout decision to mitigate rather than to intensify the conflict of interest with the weak stakeholder. Hence, the higher the potential agency cost as reflected in the firm’s stakeholder structure, the more the actual agency cost is reduced by the strong stakeholder’s dividend payout decision. These findings are consistent with a dividend policy in which opportunistic power abuse in stakeholder conflicts is discouraged by costly consequences for the abuser at a later stage. Indirect evidence supports this interpretation.     

Dividends, Asymmetric Information, and Agency Conflicts: Evidence from a Comparison of the Dividend Policies of Japanese and U.S. Firms

We compare dividend policies of U.S. and Japanese firms, partitioning the Japanese data into keiretsu, independent, and hybrid firms. We examine the correlation between dividend changes and stock returns, and the reluctance to change dividends. Results are consistent with the joint hypotheses that Japanese firms, particularly keiretsu-member firms, face less information asymmetry and fewer agency conflicts than U.S. firms, and that information asymmetries and/or agency conflicts affect dividend policy. Japanese firms experience smaller stock price reactions to dividend omissions and initiations, they are less reluctant to omit and cut dividends, and their dividends are more responsive to earnings changes.     

Corporate social responsibility overinvestment in mergers and acquisitions

Corporate social responsibility (CSR) has been advocated by scholars and practitioners whereas overinvestment in CSR can destroy value. This paper investigates how CSR overinvestment influences firm value in the context of mergers and acquisitions (M&As). Specifically, we examine the shareholder wealth and financial performance of firms who bid on targets with CSR overinvestment. The results suggest that firms purchasing CSR-overinvesting targets experience significant declining market reactions to the M&A announcements and deteriorating financial performance following the M&A transactions. We further show significant improvement in CSR ratings and CEO pay among acquirers purchasing CSR-overinvesting targets. Moreover, the adverse effects of CSR-overinvesting targets on M&A outcomes are more pronounced for the acquiring firms with weak corporate governance or with retiring CEOs. Our findings suggest that a firm makes a value-destroying M&A with a CSR-overinvesting target probably for the benefit of improved CSR and CEO gains. This study provides evidence for the agency view of CSR investment in the context of M&As.     

Is corporate social responsibility sufficient enough to explain the investment by socially responsible funds?

I propose an explanation for investment decisions by socially responsible investment funds (SRI) on the firms with higher corporate social responsibility (CSR). Different from the previous literature, I use a unique and comprehensive measure that considers both firm CSR ratings and fund CSR perception. I show SRI mutual funds increase their ownership about 15 % for one unit increase in the firm CSR score when those funds are highly sensitive to CSR. This finding is more pronounced for employee relations and society areas of CSR. The results also hold for a broader range of mutual funds. While industry concentration does not have influence on the fund investment, SRI funds particularly choose socially responsible firms operating in construction, transportation, personal services, and financial sector. I show the funds with CSR sensitivity underperform the market in general and fail to improve their portfolio performance after they invest in the firms with high CSR.     

Sales order backlog and corporate social responsibility

We examine the impact of sales order backlog, an important leading indicator of firm performance, on corporate social responsibility (CSR) performance (measured as responsible and irresponsible CSR performance). We rely on the stakeholder and resource availability views of CSR to develop our hypotheses. Under the stakeholder view, we posit a positive relation between sales order backlog and CSR performance. Under the resource availability view, we posit this relationship to be negative. Our empirical evidence shows a significant positive relation between order backlog and irresponsible CSR performance, suggesting that firms with higher order backlog demonstrate lower overall CSR performance. This evidence is consistent with the resource availability view that engaging in CSR activities consumes valuable firm resources, and thus, firms with limited resources are less likely to invest in CSR initiatives. Firms with high levels of unfulfilled sales orders must focus on fulfilling those orders, and may not be able to devote resources to CSR.     

International Evidence on Financial Derivatives Usage

Theory predicts that nonfinancial corporations might use derivatives to lower financial distress costs, coordinate cash flows with investment, or resolve agency conflicts between managers and owners. Using a new database, we find that traditional tests of these theories have little power to explain the determinants of corporate derivatives usage. Instead, we show that derivative usage is determined endogenously with other financial and operating decisions in ways that are intuitive but not related to specific theories for why firms hedge. For example, derivative usage helps determine the level and maturity of debt, dividend policy, holdings of liquid assets, and international operating hedging.     

Free Cash Flow,Shareholder Value,and the Undistributed Profits Tax of 1936 and 1937

In 1936, the Federal Government unexpectedly imposed a tax on undistributed corporate profits. Despite the direct costs of the tax, its announcement produced a positive revaluation of corporate equity, particularly among lower-payout firms. We interpret this as evidence of a divergence between managerial and shareholder preferences regarding dividend payout policies, consistent with the presence of agency costs. We also find that despite the incentives created by the tax, the actual growth in dividends during 1936 was lower among firms judged more likely to be subject to higher agency costs after controlling for liquidity, debt, and the growth in earnings.     

Dividends,Corporate Monitors and Agency Costs

We report new evidence on the hypothesis that dividends reduce agency costs. Consistent with dividends as a mechanism to reduce agency costs, we find that, on average, firms with a majority of strict outside directors on their boards experience significantly lower mean abnormal returns around the announcements of sizeable dividend increases. Our results are robust to multivariate controls for firm size, leverage, ownership, growth options, and change in dividend yield. However, we find no evidence that dividend increases reduce agency costs as measured by poison pills or outside blockholdings.