CSR Disclosure, Dividends and Firm Value – Relations and Mediating Effects

Abstract

Managers use corporate social responsibility (CSR) disclosures to signal future financial prospects. Prior literature documents a positive relation between CSR disclosure and financial consequences, such as higher firm value. Dividends play a similar signaling role with similar financial consequences. This paper provides evidence regarding the interplay among CSR disclosure, dividends and firm value, relying on a large multi-country sample. First, we find that firms with higher levels of unexpected CSR disclosure are likely to pay higher dividends, and that this result is attributable to firms where CSR disclosure is aligned with CSR performance (both CSR disclosure and performance are high or both are low). Second, we assess whether the positive relation between CSR disclosures and firms’ share price persists after introducing dividends as a control. We find that unexpected CSR disclosure are associated with higher share prices, but not after controlling for dividends, i.e. dividends fully mediate unexpected CSR disclosure. Sub-sample analyses show that full mediation occurs when firms’ CSR disclosures are aligned with CSR performance, while in the unaligned sample unexpected CSR disclosure is still informative. Our findings are consistent with the view that managers use both CSR disclosure and dividends to signal future prospects, which are therefore both positively associated with share prices, but where CSR disclosure and performance are aligned, CSR disclosure loses its information value to market participants. The mediation effect we document implies that prior firm value study results should be interpreted with caution, and future studies should control for dividends.

Keywords: Corporate Social Responsibility; CSR disclosure; Global Reporting Initiative; Valuation

JEL Classification: G35, M14