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Asian Review of Financial Research Vol.35 No.2 pp.107-145
ESG Activities and Dividend Policy in Korean Firms
Sung-Chang Jung 전남대학교 경영학부 교수, Professor, Chonnam National University
Young-Hwan Kim* 전남대학교 강사, Lecturer, Chonnam National University
Key Words : ESG,ESG,Dividend policy,Stability of dividend policy,Agency theory,Life cycle theory


Recently ESG (Environmental, Social, Governance) activities have attracted a lot of theoretical and practical attention. With these changes, there have been an active research on corporate social responsibility activities measured by ESG and major financial strategies of companies. Related with previous research, this study seeks to systematically analyze the association between social responsibility activities and dividend policies of corporations. Studies such as Rakotomavo (2012) and Benlemlih (2019) suggest that social responsibility activities have a positive impact on dividend policy, while studies such as Pham and Jung (2020) and Ni and Zhang (2019) report that social responsibility activities have a negative effect on dividend policy. In addition, the domestic previous research has analyzed the effect of social responsibility activities on dividends by using a simple OLS regression. These studies have not considered the endogeneity problem of variables and the partial adjustment of dividends with panel data. They did not investigate the relation between corporate social activities and stability of dividends either. Studies on these topics with Korean firms are still lacking. The dividend theory has been greatly developed with signaling theory, agency theory, and life cycle theory based on the dividend-irrelevance theory of MM (1961). If the signal theory of dividends is true, it can be argued that social responsibility activities will affect dividend payout level positively (Benlemlih, 2019). If the outcome hypothesis of agency theory of dividend is true, social responsibility activities will show a positive relationship between dividend levels (Adjaoud and Ben-Amar, 2010), conversely, if substitute hypothesis of agency theory is true, social responsibility activities and dividend levels will show a negative (-) relationship (John and Knyazeva, 2006). According to life cycle theory, corporate social activities have a positive association with dividend payout (Rakotomavo, 2012). In addition, Benlemlih (2019) shows that the companies with excellent levels of social responsibility activities prefer to have more stable dividend policy in order to signal a reduction in agent costs through dividend and a sound management policy. Matos, Barros and Sarmento (2020) also show that the firms with more sustainability have more stable dividend policies by using data from the European securities market. These studies imply that social responsibility activities are expected to have a significant impact on the stability of dividend policies. This study utilizes the ESG ratings provided by the Korea Corporate Governance Service as the measures of CSR/ESG activities of firms. We collected the data from the non-financial firms listed in Korea security market during the period of 2013 through 2019. The financial data required for analysis used the KIS-VALUE database of Korea Credit Evaluation Information. The information about the major shareholders' equity was collected from the section of ownership status in the annual reports of the firms. The samples used in this study are 4,126 firm-year unbalanced panel data. The empirical analysis was conducted by applying a fixed effect panel analysis and a two-stage fixed effects panel analysis using the industrial average of social responsibility activities as an instrumental variable for social responsibility activities to alleviate the endogenous problem of social responsibility activities. The results of the analysis are as follows: First, the empirical results show that the ESG activities of the company have different effects on dividend level according to the measures of dividend payout. When dividend payout ratio (dividend/net income) is used for the dependent variable, only the social rating has been analyzed to have a statistically significant and positive effect on dividend. On the other hand, when dividend rate (dividend/total asset) and dividend yield(dividend/stock price) are used as dependent variables, the company's ESG integration rating, environmental rating, social rating, and governance rating have been shown to have a significant and positive impact on dividend. These results shows that the increase in corporate social responsibility activities among corporate ESG activities can improve the dividend propensity of companies. Since the dividend payout ratios of Korea firms remain relatively low, it is suggested that the company's social responsibility activities should be strengthened more in order to increase dividend propensity. In addition, it can be confirmed that the company's ESG activities have a significant and positive impact on the dividend level of the company, so that the company should be more interested in ESG for sustainability. In other words, the more a company have interests in the various stakeholders of the firm, the more profitable it is for shareholders. Second, this the findings can be explained by the outcome hypothesis of agent theory and the life cycle hypothesis. The cash ratio, which is the proxy variable of the agency issue, has a significant and positive effect on dividend propensity. Cash ratio, majority shareholder equity, foreign equity have a positive association with the dividend ratios, and the majority shareholder's ownership has a significant and positive impact on dividend yield. In addition, it was also confirmed that the ratios such as operating cash flow/total assets, earned surplus/total assets, and gross operating profit/total assets, which are the proxies of life cycle theory, are significantly and positively associated with the dividend rate. The variables such as market value/book value, earned surplus/total asset, gross operating profit margin have a significant and positive impact on the dividend yield. Third, the ESG activities were analyzed to have a significant impact on the stability of dividend policy. The better the ESG activity, the higher the target dividend level, and the faster the difference between the target dividend level and the actual dividend level was adjusted. This means that the better the ESG activity, the higher the sustainability, and the higher the dividend level can be maintained. Since the company is more profitable with better ESG activity, it can be adjusted to the target dividend level more quickly.
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