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Do firms adjust their payout policy to public perception of their social irresponsibility?

Author

Listed:
  • Pascal Nguyen

    (MRM - Montpellier Research in Management - UM1 - Université Montpellier 1 - UPVM - Université Paul-Valéry - Montpellier 3 - UM2 - Université Montpellier 2 - Sciences et Techniques - UPVD - Université de Perpignan Via Domitia - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School)

  • Nahid Rahman

    (Australian National Institute of Management and Commerce)

  • Ruoyun Lucy Zhao

    (UTS - University of Technology Sydney)

Abstract

Perception of social irresponsibility from negative media coverage may affect a firm's payout in two opposite ways. Firms may lower dividends in anticipation of greater financial constraints or pay higher dividends to signal that potential damage to their reputation and future cash flows is expected to be limited. Using data from RepRisk for a sample of US firms, we find compelling evidence supporting the second outcome, i.e., firms perceived as socially irresponsible pay higher dividends. This result remains valid for different payout measures and after controlling for endogeneity using instrumental variables, entropy balancing, and a difference-in-differences approach. Furthermore, the relationship is stronger for high-growth firms, consistent with their greater needs for external finance. The signaling motive is further supported by the stronger valuation effect of dividends for firms perceived as socially irresponsible, as well as the subsequent decrease in the perception of their irresponsibility and higher sales growth. Overall, the results suggest that firms use dividend policy to mitigate the potential damage due to the perception of their social irresponsibility.

Suggested Citation

  • Pascal Nguyen & Nahid Rahman & Ruoyun Lucy Zhao, 2024. "Do firms adjust their payout policy to public perception of their social irresponsibility?," Working Papers hal-04729256, HAL.
    • Handle: RePEc:hal:wpaper:hal-04729256
    Note: View the original document on HAL open archive server: https://hal.science/hal-04729256v1
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