Covid-19 and the Payout Policy of the ESG Managed Firms

Abstract

This paper presents evidence that the ESG management can play a key role in the corporate dividend policy under the hostile environment of the Covid-19 period. Firm risk increases and profitability deteriorates most significantly during the Covid-19 period, but once the firm acquires high ESG ratings, it tends to maintain a sturdy dividend policy. As a result, firms of high ESG ratings have shown persistently higher propensities of dividend payments compared to the low ESG rated or the non-participating firms. Firm characteristics of different ESG groups are statistically different and have evolved over the crisis period in a manner that is consistent with the changing dividend patterns as well. The decomposition technique of Maarten (2010) based on the factual and the counterfactual conditional distribution breaks down the dividend difference into the part that is caused by the firm characteristics and the remaining portion that is explained by the pure ESG group effect. During the normal period, firm characteristics explain dividend behaviors fairly well, say 89.7%, but this explanatory power drops to 74.9% during the Covid-19 period. On the other hand, the proportion contributed by the ESG effect increases from 10.3% to 25.1% during the crisis period, suggesting that this non-financial ESG criteria can lead firms to maintain more shareholder friendly dividend policy. High ESG firms are generally large, profitable, less risky and more mature firms, all of which are the common firm characteristics of dividend payers, but even after accounting for this systematic difference in firm characteristics, the high ESG rating still can make a noticeable difference in the dividend payments during the crisis period.