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The investigation of 115 Indian listed corporations (ILCs) from 2009 to 2012 shows that the dividend payout policy and the signalling of voluntary corporate social responsibility disclosure are the decisions that are strategically made by the board of directors of ILCs to balance the interests of various stakeholders. The study explicitly links the Indian way of doing business with a larger mission of serving the community. According to the study, dividends and CSR disclosures are complementary ways to manage the goal of stakeholder engagement. According to the research conducted in the Indian context, managers use both CSR disclosure and dividends to signal sustainable future success, which is similar to the research of the study of European enterprises. The research also shows that institutional investors respect this complementary relationship between dividends and CSR disclosures highly.


Market response to a company’s dividend policy has typically been attributed to informational concerns, such as the company’s earnings opacity and the disclosures’ lack of openness. The principal agency conflict between majority shareholders and minority shareholders in emerging capital markets made these problems worse[1]. About 65% of the market capitalisation of the Indian stock market is made up of family-run business groups. According to research, controlling families decide how much money to give out in dividends depending on their own interests, and family involvement in management has an impact on how well businesses operate. [2] As a result, CEOs of family-run businesses may be able to manage the company’s external reputation by lofty declarations about their corporate social responsibility (CSR) efforts, while still choosing dividend payout strategies that will optimise the value of their enterprises. Meanwhile, several researchers believe that the conventional principal-agent dilemma is less of a concern because family owners are connected to the firm’s senior management or are themselves a part of it and can closely oversee the investments[3]. This perspective contends that voluntary CSR disclosures accurately reflect the beneficial CSR actions that Indian listed companies (ILCs) engage in.

Analysts contend that the government has introduced mandated ESG expenditure for the first time in history with the passage by the Indian parliament of the new Companies Bill, which mandates that businesses larger than a particular size spend at least 2% of yearly revenues on CSR initiatives. The author contends that CSR is inherently an inspiring activity and that it is challenging to legislate the management objectives of a corporation. Instead, as a result of this law, corporate boards are likely to categorise their current charitable and social endeavours as CSR spending with little to no impact on social welfare. Additionally, the transaction cost theory put forth by Riordan and Williamson (1985), contends that “board of directors decisions arise endogenously, as means by which to safeguard the investments of those who face a diffuse but significant risk of expropriation because the assets in question are numerous and ill-defined and cannot be protected in a well-focused, transaction-specific way.” As a result, the board of directors (BoD) of a company is likely to act in the long-term interest of the business by deciding how much money is invested in CSR initiatives against how much is dispersed as dividends. We investigate whether, for reputation management purposes, the Boards of Directors of ILCs regard CSR disclosures and dividend pay-outs as complementary actions that are interconnected.

The signalling theory should be applied more systematically to understand businesses’ strategic CSR actions, according to CSR research. He contends, specifically, that “CSR programmes reflect a problem of moral hazard inside to the corporation, where the managers seek personal ambitions of exposure and reputation at the price of the interest of the shareholders” (Friedman, 1970). CSR proponents respond to this argument by claiming that businesses can strategically participate in CSR projects and gain private benefits. contending that agency theory, stakeholder theory, and resource-based theory viewpoints on CSR disclosures may all be integrated using signalling theory. His conception that CSR disclosures can be seen as indications that market players use to identify and separate ethical businesses from unethical firms is pertinent to our investigation. Our assessment of the literature contends that ILC CEOs are experts at signalling through CSR disclosures, particularly to persuade institutional investors of their capacity for “making well by doing good.”

This study investigates whether the kind of ownership affects the information signal sent by the strategic dividend payout policy and CSR disclosures, which affects the value of ILCs. We are not aware of a study that looks at the combined effects of dividend payment and CSR disclosures in a developing nation[4]. Studies have looked at the effects of dividend payout or CSR disclosures independently on firms’ valuations. According to Cappelli, Singh, Singh, and Useem (2015), Indian CEOs are known to embrace a broader social mission for their businesses beyond shareholder value maximisation, which could lead to dividend signalling and signalling via voluntary CSR disclosures becoming interdependent strategic choices. As a result, a key goal of our research is to determine if dividend payments and CSR disclosures are complementary or only partially substitutable. This study investigates whether voluntary CSR information disclosers had any signalling characteristics that affected firm value both individually and collectively prior to the Companies Act of 2013.

A sound theoretical framework to support the usefulness of Asian companies’ CSR disclosures can be found in signalling theory. CSR disclosures include details on a company’s hidden and intangible qualities that affect stakeholders such as clients, suppliers, and the government. The authors contend that companies can compensate for China’s and other East Asian nations’ institutional shortcomings by obtaining a premium from stakeholders through CSR disclosures. According to research on the dividend policies of ILCs, 71% of respondents think that firms view dividends as a leftover after funding the desired investments with earnings, and 93% of respondents agreed that a firm’s investment, financing, and dividend decisions are interrelated. Additionally, their research revealed that Indian investors are conservative and favour a predictable dividend stream over uncertain stock price appreciation, making the BoD’s major goal to preserve the dividend.

Some analysts came to the conclusion that dividend announcements by ILCs do have signalling features after discovering that stock prices did respond as anticipated to dividend announcements. By providing information about investments in CSR activities, the voluntary CSR disclosures by ILCs may also help protect uninformed investors from informed insider investors, such as promoters, especially when the BoD views CSR disclosures as a way to manage their company’s reputation while also keeping an eye on the CEOs’ interests in serving all stakeholders.

The distinctive qualities of business group-associated firms include vertical links of ownership control, horizontal ties resulting from cross holdings, interlocking directors, and family and social relationships that are advantageous to financial performance and growth strategies[5]. Accordingly high ownership concentration levels in ILCs, the favourable alignment effects can balance out the negative family entrenchment effects to boost firm performance. Family control, however, increases a firm’s lack of transparency, which exacerbates the principal-principal conflict between the family and minority shareholders. At the same time, family board domination and management ownership’s superior monitoring abilities can boost firm value. There hasn’t been much research that has looked at how corporate reputation affects firm value, Due to the combined effects of CSR disclosures on business reputation and their ability to persuade institutional investors.

Businesses that anticipate strong future financial success invest in CSR, as a result, they propose what they call the “CSR signalling hypothesis”—that CSR data can convey indications about the firm’s prospects. After researching American businesses, researchers discovered that a company’s financial performance is likely to improve if CSR performance is sustained. Prior theoretical justifications provide insight into how dividend policy is impacted by investments in CSR initiatives. According to agency theory, managers are incentivized to overinvest in CSR initiatives when companies have extra cash because they stand to gain personally from their company’s socially responsible behaviour. Researchers contend that by lowering the amount of money available to overinvest in CSR initiatives, a high dividend distribution aids in the control of the agency issue. Additionally, analysts demonstrate how crucial it is for institutional investors to understand how the legitimization of CSR-related political actions affects the liquidity of Malaysian companies’ stock market. Therefore, the free cash flow agency logic would suggest that dividend payment and investments in CSR activities are partial substitutes as both compete for the same pool of resources created from earnings, in contradiction to the dividend and CSR signalling hypothesis.

According to the report, since 2001, earnings per share have increased in line with Indian norms, but dividends per share have stayed flat. The years 2011–2012 saw the highest discrepancy between earnings per share and dividends per share. We were motivated to choose the time period for our study because of this disparity. These writers also credit the BoD’s extreme conservatism and caution while establishing the dividend policy of ILCs for this gap in earnings and dividends. According to American research, insider ownership, debt, and dividend payout policies are all related, with companies with more insider ownership deciding to cut payout as share liquidity increases. Therefore, it is critical to investigate if company ownership types affect the BoD’s behaviour regarding dividend payout and whether ILCs used CSR disclosures as a supplement to or a partial replacement for dividend signalling before the law required ESG spending in 2013.

Our findings reveal a non-linear association between insider ownership levels and firm valuation across a four-year period, from 2009 to 2012, using a sample of 115 ILCs. Larger company value is likewise related to higher institutional ownership levels. Higher dividend payout is positively and significantly associated with firm value, dividend payout interacts with voluntary CSR disclosures to positively affect firm value, and institutional investors’ investments are the channel causing the complementarity of dividend signalling and voluntary CSR disclosure signalling, according to three other supported hypotheses. Therefore, we contend that dividend payments and voluntary CSR disclosures are complementing board actions in ILCs because institutional investors value the signalling features they have. This study supports the opinion expressed by Karnani (2013) and other scholars that it may not be a good idea to legally require CSR activities in less developed nations like India.

Our study makes three distinct contributions. The study first investigates whether there is a CSR performance link that has been seen in other rising economies in India We discover that CSR disclosures only indirectly influence firm value in the institutional environment of India. Additionally, this study could serve as a foundation to investigate the impact of insiders on CSR activities following the enactment of the law when the Indian Companies Act mandates investments in CSR after 2013 Additionally, the dividend signalling theory claims that in nations like Taiwan and Chile, businesses that want to protect the interests of minority shareholders do so by reducing the dividend payout as a percentage of profits, which is also impacted by the cash flow rights of the controlling families[6]. According to our research, dividend signalling has been linked to firm value in the same way that signalling theory has been used to explain the value of CSR disclosures by ILCs, as was the case in the study of East Asian companies. By recommending that future studies take into account controlling for the short- and long-term effects of CSR activities on firm value, this study adds to the body of literature on dividends and the links between voluntary disclosure research and business value.

Investigating the moderating impact of institutional ownership also helps to understand why ILCs employ dividend and CSR disclosures as complementing signals given the limited enforcement of laws and corporate governance procedures. Given the difficult institutional environment, it may be necessary for the ILCs to entice investments from institutional investors if they are to maintain firm performance, growth, and dividends. In order to provide insight into the integration of various theories used in dividend studies, the CSR literature, and the corporate governance literature, our study highlights how an institutional investor can monitor the boards of companies in less developed countries with weak corporate governance.

Development Of Hypotheses

Researchers examined the dividend behaviour of 1574 American companies over a 20-year period in 2011, and they came to the conclusion that their results are consistent with the forecasts made by the agency cost theory of free cash flow, which led them to believe that this theory held the most promise. According to this idea, there will be a positive correlation between dividend smoothing and dividend payout levels, which will depend on how serious the free cash flow agency problem is. Findings indicate that managers act as if the dividend policy is important to firm value and strongly believe that the capital market rewards companies with a stable dividend payout with higher share prices. On the other hand, it came to the conclusion that institutional investors are more likely to own dividend smoothing equities in the United States than retail investors. However, research indicates that dividend smoothing is expensive for businesses.

These papers present the alignment hypothesis and the entrenchment hypothesis, two opposing theories, to explain the relationship between management ownership and firm value. In the United States, management ownership and business value have an inverse U-shaped relationship. There is an alignment effect or a positive association between managerial ownership concentration and company value with dispersed managerial ownership, which becomes negative for the range of insider ownership between 5% and 25%. The growing information imbalance between insider and outsider shareholders is thought to be the cause of the unfavourable effect, known as the entrenchment effect; however, the alignment effect appears to predominate at managerial ownership levels above 25%.

Although there is conflicting data in emerging nations, it is generally accepted that the alignment effect—which even prevails in Indian family businesses—outweighs the entrenchment impact (Hegde et al., 2020). The family owners are motivated to concentrate on the long-term profitability of the company by their desire to pass the company on to next generations.

Hypotheses 1

Generally speaking, insider ownership levels and firm value in ILCs have a non-linear connection.

In major UK companies, Researchers found a U-shaped association between insider ownership levels and payout ratios. This relationship was attributed to managerial entrenchment. One analyst looked at UK companies as well and discovered a connection between dividends and ownership concentration. A non-linear relationship between insider ownership and dividends has been observed in emerging economies. The size of dividend payout may therefore be crucial for minority shareholders and other stakeholders to evaluate the firm’s value in a less efficient capital market.

Generally speaking, ILCs’ dividend payout ratios are closely related to the market valuation of their company.

When markets or tactics shift, according to analysts, “U.S. corporations lay off workers to save costs and then hire new ones to refocus the business on new markets or to fill new skill demands. With financial incentives (through ownership) granted to the executives and senior managers, this approach tends to focus mostly on the top in terms of leveraging employee motivation and skills. They contrast this with ILCs, who view servicing all stakeholders as their most essential purpose and who, in particular, empower their staff.

According to a study, social ratings and business reputation as demonstrated by awards have a big impact on how much information ILCs provide about their corporate social responsibility. Therefore, there is rising evidence of a tendency in the private sector, including India, where businesses firmly adopt a social and environmental paradigm, which maintains that it is feasible to have a wealthy economy with a thriving stock market as well as a healthy workplace and community.

ILCs’ optional CSR disclosure levels and dividend payout percentages interact favourably to increase firm value.

According to Analysts, businesses modify their smoothed dividend supply to satisfy investor demand. Notably, they discovered that institutional investors in the US are more likely than retail investors to hold dividend smoothing stocks. Their research, however, was unable to identify any connections between market valuations, predicted returns, and how smoothly dividends are paid out. Mutual fund ownership levels are positively correlated with the amount of cash dividends paid by Chinese companies, according to research that looked at the relationship between institutional ownership and dividend policy in UK companies.

Additionally, there is a negative correlation between unrelated diversification and the percentage of ownership in ILCs by for-profit institutional investors and mutual funds. However, senior management and insiders often succeed in diversifying into unrelated company sectors thanks to banks’ participation in ILCs. They also found that none of the diversification measures that affect business value in India is related to foreign ownership or government ownership. Thus, in order to reduce the principal-principal agency conflict, only the pressure-resistant institutional investors appear to operate consistently in the manner predicted by agency theory.


Studying the trade-off between returns to shareholders in the form of dividend distributions vs. returns on social capital is crucial given that family-controlled businesses and India’s institutional environment prioritise returns on social capital. Excessive CEO compensation in ILCs is not the result of CEO entrenchment, but rather the need for skill, according to studies on the influence of CEOs on boards that determine investment and dividend decisions in India. We anticipated that most CEOs and boards would collaborate to effectively balance investments in dividends and CSR activities based on the Indian leadership studies. In light of this conviction, we contend that CSR disclosures act as a supplementary signal to inform shareholders of the viability of their dividend policy. In contrast, CSR disclosures made by ILCs could point to potential hypocrisy on the part of CEOs and boards who invest in CSR for their own financial advantage. Our research supports the idea that ILCs’ dividend signalling is a complementary practice, not a partial replacement. Our Indian research confirms that the big European firm managers use dividends and CSR disclosure to predict future performance. The complementary relationship between dividend signalling and signalling via CSR disclosures is valued by institutional investors, we also discover.

For managers of Asian businesses, our findings may offer helpful advice for dividend payments and CSR initiatives. It might be expensive to invest in CSR initiatives and gradually increase the distribution of earnings as dividends. Additionally, CSR disclosures show how businesses strike a balance between their economic, social, and environmental goals while meeting stakeholder expectations. Thus, realising that dividends and CSR disclosures are complementing forms of signalling should help smaller Indian growing companies who are under financial pressure to fulfil the larger goal of cultivating stakeholder connections. In addition to helping to resolve the principal-principal agency conflict between insiders and minority investors in ILCs, our study contends that CSR activities and the disclosure of doing good also help to address the information asymmetry between insiders and outside stakeholders and help to improve the reputation of the company.

The findings of the study support the use of CSR as a strategic signal by the boards of ILCs to persuade institutional investors of the sustainability of future corporate performance, together with dividends. Similar to East Asia, South Asia is still in the early stages of developing the use of CSR to improve corporate performance. The Indian Companies Act, which has set spending requirements for CSR initiatives, may have the impact of increasing the adoption and imitation of CSR’s environmental and social components. However, if it is thought to be at the expense of economic CSR, that could present a strategic problem for ILCs. The ILCs may be forced to consider the strategic value of their CSR more seriously beyond empowering employees along with their commitment to providing stable dividends as the Indian economy attracts more investment from foreign institutional investors with experience using CSR to affect business performance.

This study has limitations because it focused on a single nation for a brief period of time and was unable to identify the typical corporate governance processes outside of ownership that affect business value. However, given that past research has found the performance impact of board qualities to be insignificant, this may not come as a surprise. Our study makes a significant contribution to the understanding of the principal-principal agency conflict by showing how dividend payouts and voluntary CSR disclosure levels are interdependent and reduce agency conflicts as a result of intuitional investors’ interest in their combined signalling properties. Future research could evaluate the effects of the 2013 Indian Companies Act, which mandates that companies spend 2% of their average net earnings on CSR initiatives, by examining the signalling characteristics of dividends and CSR disclosures before and after the law’s passage. We urge comparable studies throughout emerging nations with a wider sample of listed companies that have ESG disclosure scores available in the Bloomberg database and/or on standalone company websites.

[1] Filatotchev et al., 2011, Young et al., 2008)

[2] Huang, Chen, & Kao, 2012). (Chu, 2011, Young et al., 2008)

[3] Dharwadkar et al., 2000; Ashwin et al., 2015)

[4] (Lu and Taylor, 2016, Lys et al., 2015

[5]  (Popli et al., 2017, Singh and Delios, 2017

[6] Huang et al., 2012, Mahenthiran et al., 2020)

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