Abstract
A CEO who has an opportunity to pursue his interest may sacrifice investors with inefficient investments such as overinvestment in corporate social responsibility (CSR). As prior researchers have suggested a possibility to detect the perk portion of CSR investment using the dividend tax cut event, we tested whether managers decreased CSR spending while accelerating dividend payouts during the Korean dividend tax cut of 2015. Consistent with the prior studies on the dividend tax cut, we discovered a pattern of incremental dividend increase for the companies of agency conflict measured by extreme CEO ownership. However, we failed to find any statistically significant simultaneous reduction in donations after 2015. This study does not provide evidence that investments in CSR of Korean firms are not due to CEOs’ personal interest-seeking. Instead, we showed that the dividend tax cut event may not work as a universally applicable quasi-experimental setting to detect management overinvestments in CSR.
Highlights
Researchers have tested the relationship between corporate social responsibility (CSR) and firm financial performance and often found a positive relationship [1,2,3,4,5]
Following Amato and Amato [94], we standardized our dependent variables with sales revenue, to reflect the possible correlation between firm performance and donations suggested by the slack resource theory
We tested the possibility of detecting management perk via CSR investment using the natural experimental setup of the dividend tax cut following Cheng et al [28] and Masulis and Reza [24]
Summary
Researchers have tested the relationship between corporate social responsibility (CSR) and firm financial performance and often found a positive relationship [1,2,3,4,5]. The simultaneous increase in dividend and reduction in donations will support a hypothesis that claims the possibility that some of the investments in CSR of Korean firms are due to the managers’ private interests, especially when the management has a higher level of discretionary power or resources to manipulate. To confirm the robustness of our main findings, we employed fixed and random effect models and found test results that partially support the dividend increase for both extreme CEO ownership and extreme bank debt ratio groups. When it comes to donations, we could not find any statistically significant results that support our hypothesis. We suggest that the quasi-experimental design of Sustainability 2019, 11, 4041 dividend tax cut may not be universally applicable to prove managerial pursuits of self-interests via CSR overinvestment
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