Sustainability and Dividends: Complements or Substitutes?

Abstract

We examine the relationship between environmental, social, and governance commitment levels (ESG) and firm dividend-payer status. Given that larger and more profitable firms are positively associated with both payer status and ESG, it could be that ESG and dividends are complements. However, given that both dividends and ESG relate to firm spending decisions, it may be that the choice is “either/or”, and that ESG and dividends are substitutes. We document a positive relationship between ESG and dividend-payer status in U.S. firms over the period 1991–2016. In particular, we find that the proportion of dividend-payers is roughly 13% higher for firms with positive ESG compared to those with negative ESG. Including ESG in the models used to predict payer status provides, on average, a nearly 26% improvement in relative forecast accuracy. Our results are robust in regards to estimation techniques and the inclusion of variables known to be determinants of payer status. The results indicate that, on average, firms are not forced to sacrifice dividends in favor of ESG spending.