1. Introduction
A dividend policy is a financial decision to divide the business performance of a firm into dividends, distributed to shareholders and internal reserves for future reinvestment. The question of how the dividend policy affects corporate value has been of interest for many scholars [
1]. Miller and Modigliani [
2] put forth the dividend irrelevance theory, which states that dividend policies are irrelevant to corporate value under the assumption of a perfect capital market, where rational investors exist. After Miller and Modigliani’s [
2] dividend irrelevance theory was published, various studies in which the assumption of a perfect capital market was mitigated have been conducted.
Agency theory approaches dividend policies from the viewpoint of the agency problem. Jensen and Meckling [
3] argued that since the lower the internal equity ratio, the higher the agency cost, the monitoring function of the external capital market can be strengthened by increasing dividends. Fama and Jensen [
4] and Jensen [
5] also claimed that dividend policy could be used as a means to reduce agency costs for managers. Signaling theory indicated that under information asymmetry, managers can use dividends to deliver positive information on corporate prospects to the capital market [
6]. Kim et al. [
7] and Grullon et al. [
8] also contended that dividends were used as a means of signaling effect. Allen et al. [
9] and Kim et al. [
10] insisted on the customer effect theory that investors have different levels of preference for dividends.
Corporate Social Responsibility (CSR) is an obligation to protect and improve the social public interest in the process of pursuing earnings, and is a social responsibility that extends beyond legal and economic obligations. As a general definition, CSR means spending capital and acting in excess of a company’s obligations to the environment, community, employees, shareholders, etc. [
11].
In addition, many scholars and managers are showing interest in corporate sustainable management (CSM), a managerial goal that seeks harmony with the economic, environmental, and social contexts that can affect corporate business [
12]. Notably, CSM focuses on long-term sustainable corporate value rather than simply maximizing short-term earnings. In general, CSM has a slightly broader concept than CSR; the former has the ultimate goal to meet in business operations, and the latter is an intermediate step toward the goal [
13]. We use the two terms interchangeably because they are interrelated and in most cases are treated as substantially the same. As a result, CSM may take various advantages from the enhanced relationship with stakeholders, including improved employee productivity, product market benefits, and advanced management efficiency [
14,
15].
Meanwhile, firms with high CSR can decrease the cost of capital [
16], which can, in turn, increase incentives for cash holdings or active investments, leading to decreases in cash dividend payments [
17]. In addition, firms with a high CSR can reduce their risk and improve profitability by reducing transaction costs [
18] or strengthening their competitive advantages [
19]. Dividend decision-making is not compulsory, but remains a basic and traditional way for investors to generate returns on investments. Therefore, dividend policies can be a socially responsible attitude toward the distribution of wealth [
20].
While presenting the concept of implicit claims of stakeholders, namely employees, consumers, and suppliers, Cornell and Shapiro [
21] concretized the implicit claims as net operating capital (NOC). These studies suggest that a positive relationship exists between implicit claims and dividends, and present the logic that the signaling balance model of Miller and Rock [
6] can be applied to stakeholder theory in relation to dividends. Holder et al. [
22], conversely, apply a different logic, arguing that there is a negative relationship between implicit claims and dividends. In their view, dividends are reduced because liquidity must be secured for socially responsible activities that reflect the preferences of stakeholders. As such, the empirical results on CSR activities and dividend policy are mixed.
Corporate governance plays a role as a control mechanism that solves or alleviates the agency problem between managers and investors [
23]. La Porta et al. [
24] presented the managerial opportunism hypothesis, which proposes that the better the corporate governance is, the more the dividends will be increased to reduce the agency problem. In addition, the substitute hypothesis states that there is no need to pay excessive dividends because better corporate governance reduces agency problem. In this study, we will examine the dividend policy according to membership in a chaebol group, which is a unique corporate governance structure in Korea.
In this regard, whether the influence of belonging to a chaebol group, on corporate value is positive or negative can be discussed from two perspectives. Since the manager of a firm belonging to a chaebol group is controlled by the majority shareholder while maintaining a lasting relationship with the majority shareholder, the conflicts between manager and shareholder will be suppressed. Shin [
25] suggested that in a situation where the controlling shareholder invested a considerable portion of his or her property in some firms, the motive of the controlling shareholder to closely monitor the management is much stronger than that of general shareholder, who have diversified investments in many firms. McNeil et al. [
26] found that the controlling shareholder is involved in the movement of managers within a group of firms as he or she plays a role in evaluating and managing managers. Given the degree of authority vested to the majority shareholder. Thus, managers have fewer opportunities to make discretionary decisions.
In addition, there are cases where firms belonging to a chaebol group have been criticized due to the fact that the controlling shareholder exercises ‘voting rights’ exceeding his/her ‘ownership’ to expand his/her wealth, ignoring the interests of minority shareholders. This problem becomes even more serious in the absence of mechanisms to control the discretion of the controlling shareholder [
25,
27,
28].
Using 4718 Korean firm-year observations over the 2011–2018 period, our regression results show that the relationship between CSM and dividends was a significant positive relationship. This means that firms with more active CSM activities pay more dividends. With regard to the determinants of dividends, CSM activities can be interpreted from the viewpoint of the agency problem and signaling theory. Furthermore, the association between CSM and dividends is more negative for firms belonging to a chaebol group, which, in turn, indicates that the positive relationship between CSM and dividends in a firm belonging to a chaebol group is weakened.
When compared to previous studies related to dividend policy, this study makes the following contributions. First, this study provides evidence that CSM activities can have effects as a determinant of dividend policy. Second, this study is meaningful in that it directly examines the role of corporate governance in the relationship between CSM and dividend policy. This study suggests that corporate governance through whether or not a firm belonging to a chaebol group works as an alternative to reducing the agency problem in the relationship between CSM and dividends.
This study proceeds as follows.
Section 2 reviews the theoretical background and develops hypotheses, and
Section 3 presents the research design. In addition,
Section 4 reports the empirical results and
Section 5 concludes the study.
5. Conclusions
This study analyzed the effects of CSM on dividend policy using 4718 firm-years samples from 2011 through 2018. In addition, the effects of CSM on dividends according to whether or not belonging to a chaebol group were studied. Jensen [
5] stated that continuous dividend payments can reduce the agency problems by minimizing the firm’s free cash flow. In cases where a firm has free cash flow, the manager can have an incentive to expand investments to investment proposals that would not create value. Therefore, the agency problems due to overinvestment can be reduced by minimizing free cash flow through dividends. Miller and Rock [
6] argued that managers can use dividends as a means to deliver superior information on corporate prospects to the market.
Meanwhile, studies on CSR are linked to major detailed topics of the corporate finance theory. Considerable studies have been conducted on the causal relationship between CSR activities and corporate value. In particular, the causal relationship between CSR activities and capital structure decisions/dividend policy has recently been attracting attention as a research topic. However, regarding the relationship between social responsibility activities and dividend policy, previous studies do not present consistent analysis results.
A study conducted in the early days after stakeholder theory [
9] first suggested the logic that if more investments are made in social responsibility activities, the dividend payout ratio will decrease, and the results of empirical analysis indicate a negative relationship between social responsibility activities and dividend payout ratios. On the other hand, Rakotomavo [
69] empirically shows that corporate dividends and social responsibility activities have a complementary relationship, and therefore, the level of social responsibility activities has a significant positive relationship with the dividend prediction errors. Benlemlih [
20] also shows that high CSM firms pay more dividends, because firms use dividend policies to manage the agency problems caused by excessive investments in social responsibility activities. As such, previous studies do not provide consistent results regarding the relationship between social responsibility activities and dividend policies. Therefore, this study aims to empirically analyze the effect of the unique corporate governance structure in South Korea (chaebol) on the relationship between CSM and dividends.
This study is expected to have the following implications. This study is differentiated in that it examined the relationship from the viewpoint of financial decision-making termed CSM activities and dividends unlike previous studies. This study is expected to present additional determinants for various dividend policies of firms. In previous studies, factors in which dividend policies differ from firm to firm have been presented as various factors such as information asymmetry, the agency problems, dividend-related tax policies, and corporate financial characteristics. However, we suggest that CSM activities can also be a significant factor for the diversity of dividend policy. Furthermore, this study is significant in that it directly examined the role of a chaebol groups in the relationship between CSM activities and dividends. This study demonstrated that CSM activities can also affect the decision-making of managers belonging to a chaebol group. This study’s findings provide evidence that expands the meaning and role of CSM activities. Given that resolving the interest incompatibility between investors and managers is the focus of corporate governance, dividend policy can be used as a method of resolving such incompatibility. Finally, as the relationship between CSM activities and dividends seems to be weakening in the chaebol group, the dividend level is decreasing as the importance of understanding of other stakeholders (employees, consumers, suppliers, local communities, etc.). In other words, if investment activities for non-financial stakeholders are defined as CSM, the increase in CSM activities in the chaebol group can be inferred as reflecting the preferences of stakeholders other than shareholders.
The limitations of this study are first, it did not consider all the variables that affect CSM activities and dividends. Second, CSM activities are defined as non-financial indicators. Although this study revealed the fact that non-financial activities are related to dividends, a financial indicator, further deliberation is considered necessary to examine the logic to connect the two. Third, attention is required in the interpretation of regression analysis in that regression analysis is not intended to draw and apply a conclusion, but to assume a direction or roughly analyze something due to limitations in the basic assumptions and the application of analysis results. Fourth, in this study, the relationship between corporate governance and dividends was described in terms of the alternative hypothesis. However, there is a possibility that the chaebol is considered less important from the viewpoint of the agency theory and the signaling theory, so that it is not a problem of corporate governance structure. It cannot be ruled out that this is the result of the selfishness of the stakeholder or for reasons not explained.
In addition, the conceptual definition of CSM activities is expanding, and measuring indicators are gradually being diversified and elaborated. Future studies seem necessary to consider these areas. Examining the effects of CSM activities by stakeholder could be also meaningful.