Background Despite plentiful research on the link between corporate governance (CG) and dividend policy, the mediating impact of corporate social responsibility (CSR) on the CG –dividend policy link remains unexplored. This study investigates the mediating impact of CSR on the CG –dividend policy link, and explores the mechanism through which CSR mediates this relationship. Methods Firms listed on the Shanghai and Shenzhen stock exchanges are considered as a study sample. The data collection period ranged from 2012 to 2021. The final sample included 15,800 firm-year observations. Results The results findings indicate that firms with strong CG tend to pay low dividends, consistent with the substitution hypothesis, in which dividends and CG act as substitutes for each other. In addition to establishing a direct link between CG and dividend policy, our study significantly contributes to the extant literature by presenting both theoretical proposition and empirical evidence on the mediation effect of CSR in the above-mentioned relationship. We find that CSR mediates the corporate governance- dividend policy relationship, which implies that in comparison to corporate governance, CSR has a more dominating impact on firms’ dividend policy decisions, and better-governed firms are more likely to engage in CSR activities to protect their stakeholders; consequently, they prefer to hold or invest cash instead of paying dividends because CSR engagements lower the cost of equity capital. These findings were corroborated by a set of robustness tests. Conclusions Our results have several implications for firms, regulators, and investors. Firms can use high dividend payouts to compensate for poor investor protection and to maintain good relationships with investors. When making investment decisions, investors are advised to consider socially responsible firms because of their strong CG structure. Finally, policy makers should give special consideration to CSR in order to reduce environmental and social problems and to enhance the related standards to ensure the safety and security of all stakeholders and hence reduce global accusation and pressure.
Shaheen et al. (Tue,) studied this question.