Corporate investment in social
responsibility versus dividends?
Michel T.J. Rakotomavo
Purpose – The paper aims to examine whether corporate investment in social responsibility takes away
from expected dividends.
Design/methodology/approach – The article builds two hypotheses that are tested empirically
through the analysis of 17,670 US ﬁrm-year observations covering the period 1991-2007. The tests are
conducted in both univariate and multivariate settings.
Findings – The evidence supports the hypothesis that mature ﬁrms tend to invest more in corporate
social responsibility (CSR). Speciﬁcally, ﬁrms investing highly in CSR tend to be larger, more proﬁtable,
and with greater earned (rather than contributed) equity. The evidence also supports the hypothesis that
CSR investment does not subtract from dividends. Instead, CSR effort and dividend tend to increase
together. Thus, CSR investment tends to be effected by companies who can afford it, and it does not
lower value by lowering investors’ expected payout.
Practical implications – These results imply that spending resources on CSR does not lower the cash
ﬂows paid out to investors. When combined with the ﬁnding that CSR lowers the cost of equity, they also
mean that CSR increases the value of a company’s stock.
Originality/value – This is the ﬁrst study that explicitly links CSR to the dividend ﬂow.
Keywords Corporate social responsibility, Investment, Dividends, Payout, Stock prices
Paper type Research paper
So much has been written about the possible relation between corporate performance on
social responsibility (CSR performance) and corporate ﬁnancial performance (CFP) that
reviewing the literature reviews has become possible. For example, Orlitzky et al. (2003)
effected a meta-analysis of 52 studies. They found a positive link between CSR performance
and CFP that emanates from increased reputation and goodwill with external stakeholders.
Margolis and Walsh (2003) analyzed 127 studies. They too found a generally positive impact
of CSR performance on CFP. Van Beurden and Gossling (2008) reviewed 24 studies. Two
thirds of those studies reported a positive relation between CSR performance and CFP. More
recent, non-review papers have focused on the fact that a negative relation between CSR
performance and ﬁnancial returns may be the expression of a lowered risk premium caused
by a decrease in risk. For example, El Ghoul et al. (2010) examine a sample of 12,915 US
ﬁrm-year observations from 1992 to 2007 and use various approaches to estimate the ex
ante cost of equity capital. They conclude that ﬁrms with higher CSR performance tend to
have a lower cost of equity.
Given the high level of attention paid to the effect of CSR performance on CFP, it is surprising
that no study has yet examined the impact of corporate investment in social responsibility
(CSR investment) on cash dividends. Speciﬁcally, does such investment subtract from
investors’ dividends? This question is important because the value of a company’s stock is a
positive function of its stream of future cash dividend payments and a negative function of its
DOI 10.1108/17471111211234833 VOL. 8 NO. 2 2012, pp. 199-207, Q Emerald Group Publishing Limited, ISSN 1747-1117
SOCIAL RESPONSIBILITY JOURNAL
Michel T.J. Rakotomavo is
Director of the International
Business Program at Cottey
College, Nevada, Missouri,