Pay Dividends or Invest in Corporate Social Responsibility: Is there an Inverted-U relationship?
This paper investigates the relationship between corporate social responsibility (CSR) investment and dividend policy, proposing and testing the hypothesis of an inverted-U shaped relationship between CSR spending and dividend payouts.
Abstract
The allocation of corporate free cash flow between dividends and CSR investment represents a fundamental tension in modern corporate governance. Shareholders seeking current income may prefer dividends, while stakeholder-oriented governance models emphasize the long-term value of CSR investment.
We develop a theoretical model suggesting that the relationship between CSR intensity and dividend generosity follows an inverted-U shape: at low levels of CSR, additional investment increases both firm value and dividend capacity; beyond a threshold, CSR spending competes directly with dividend capacity and reduces payouts.
Results
Empirical tests using a large panel of publicly listed firms across 23 countries support the inverted-U hypothesis. The inflection point varies systematically with firm size, industry, and institutional environment, suggesting that optimal CSR investment levels are context-dependent.