Pay Dividends or Invest in Corporate Social Responsibility: Is there an Inverted-U relationship?

Abstract

We offer new original insights on the ongoing debate about the financial determinants of CSR activities by investigating the relationship between dividend policy and corporate social performance. Based upon the stakeholder theory, we postulate that satisfying shareholder claims may lead, according to distributive justice, to serving the interests of other stakeholders through corporate social policies. However, when dividends paid are too high, the company may no longer have enough financial slack to satisfy the other stakeholders, implying that dividends are paid at the expense of corporate social policies. We thus expect a curvilinear relationship between dividend policy and corporate social performance. Using a worldwide sample of almost 7,000 observations, we find support for a U-inverted relationship, revealing an optimal amount to satisfy both shareholders and stakeholders. Our findings are robust to both social and environmental pillars, various dividend measures as well as ESG scores.