ABSTRACT Environmental innovation may either crowd out shareholder payouts through resource reallocation or reinforce them by signalling financial strength. This study examines how environmental innovation shapes dividend policy in Gulf Cooperation Council (GCC) markets. Using a panel of 763 firm‐year observations over 2014–2023, we relate a bounded dividend payout ratio to a granular measure of environmental innovation, controlling for corporate governance structures and firm‐level fundamentals. To address unobserved heterogeneity, dividend persistence, and endogeneity concerns, the analysis employs panel regressions with fixed effects, feasible GLS, dynamic system‐GMM, and fractional response models. Across all specifications, environmental innovation is positively and robustly associated with dividend payouts. Economically, a 0.10 increase in environmental innovation corresponds to an approximately 2–2.5 percentage‐point increase in the dividend payout ratio. Leverage is consistently negatively related to payouts, while stronger board monitoring captured by higher female board representation and a greater proportion of non‐executive directors is associated with more conservative dividend policies. The results reveal that in GCC markets, dividends act as a signalling and legitimacy mechanism that enables companies to convert environmental innovation into tangible financial benefits for shareholders rather than withholding distributions. The study adds to the CSR and environmental management literature by documenting this relationship in an emerging‐market context where ownership is concentrated and sustainability regulation is evolving, and by showing how environmental innovation shapes core corporate financial policies. The results also have implications for investors and policymakers, providing a rationale for considering dividend payments as a key channel through which markets value companies' environmental transition efforts.
Alnemer et al. (Wed,) studied this question.