SSRN Id4180523

ESG Reputational Risk, Corporate Payouts and Firm Value
Ioannis Chasiotis, Dimitrios Gounopoulos, Dimitrios Konstantios, Victoria Patsika1
Abstract
This study identifies and empirically assesses the relationship between ESG reputational risk and
corporate payouts. We provide robust evidence that ESG reputational risk stimulates higher payouts
and that the presence of strong (weak) monitoring mechanisms amplifies (attenuates) this relationship.
Turning to payout composition we show that ESG reputational risk steers firms towards a more flexible
payout mix comprising a higher analogy of share repurchases versus dividends, an effect that
intensifies under financial constraints. Moreover, we document that the market places a premium on
distributions from high ESG reputational risk firms. Collectively, our findings indicate that ESG
reputational risk raise financial risk thus firms respond by disgorging cash via a more flexible payout
regime.
Keywords: ESG, payout policy, agency costs, financial constraints, reputation risk, financial flexibility
JEL classification: E22; G30; G32; G10; G12; G14; G30
1
Chasiotis Ioannis is at University of the Peloponnese, Greece, Rectorate Erythrou Stavrou 28 & Karyotaki, 22131, Tripolis,
Greece email: i.chasiotis@go.uop.gr, Gounopoulos Dimitrios is at School of Management, University of Bath, Claverton Down
Rd, Claverton Down, Combe Down, Bath BA2 7AY, UK; email: d.gounopoulos@bath.ac.uk., Konstantios Dimitrios is at
Department of Maritime Studies, University of Piraeus, M. Karaoli & A. Dimitriou St. 80, Piraeus, 18534, Greece; email:
konstantios@unipi.gr, Patsika Victoria is at Cardiff Business School, University of Cardiff, Aberconway Building, Colum Dr,
Cardiff CF10 3EU, UK; email: patsikv@cardiff.ac.uk. We are grateful to Jawad Addoum, Kyriakos Drivas, Marie Dutordoir,
Matt Gustafson, Reynolds Holdings, Emirhan Ilhan, Dimitrios Papanikolaou (the Editor of Journal of Financial Economics),
Lukasz Pomorski, Lase Heje Pedersen, George Serapheim, Andrea Tarelli, seminar participants from the University of
Birmingham, University of Cardiff, University of Piraeus, and University of York and conference participants at the Financial
Management Association (FMA), the Sustainable Finance and Governance Workshop and the Financial Economics Meeting
(FEM 2022) for their helpful comments.
Electronic copy available at: https://ssrn.com/abstract=4180523

1. Introduction
Traditionally, corporations and the investor community focuses on financial performance, however
in recent years increased emphasis is placed on corporate reputational risk. A favorable corporate
reputation enhances financial and operational performance through its positive influence on various
significant stakeholders, such as investors, financial analysts, personnel, customers, and suppliers (Walsh
et al., 2009; Bergh et al. 2010; Dyck et al., 2019). In contrast, corporate reputational risk, i.e., risk that
manifests through changes in stakeholders’ perceptions about a firm in relation to their expectations, can
lead to adverse consequences across several firm dimensions.
Moreover, the evolution of the US corporate landscape is characterized by two major shifts. First,
during the last decades, environmental, social and governance (ESG) issues have ascended at the top of
corporate agendas, underlining their significance for business leaders, investors and consumers alike. As
a result, ESG-related performance is linked to smooth operational and financial performance, and a key
measure of success. Second, regarding payout policy, the composition of payouts changed favorably
towards share repurchases, which now constitute the dominant distribution mechanism, topping dividends
over the last decade. In this study we attempt to discern links between ESG reputational risk, payout policy
and firm value.
ESG reputational risk stems from the risk exposure of firms to environment, social and governance
issues and is likely to increase the probability of stakeholder sanctions and raise financial risk difficilitating
external financing (Kοlbel et al., 2017). However, the association between ESG reputational risk and
major financial decisions remain unexplored, thus warranting relevant empirical research. Therefore, in
this study we examine whether ESG reputational risk matters in corporate payout policy. Our motive is
the emphasis that is being placed on ESG reputational risk, the fundamental importance of the payout
decision and the evolution of corporate payouts of US-listed firms in terms of magnitude and composition.

During the last two decades, corporate payouts in the US have showcased a remarkable shift.
Initially, the composition of payouts changed favorably towards share repurchases, which now constitute
the dominant distribution mechanism, topping dividends over the last decade (Skinner, 2008; Floyd,
2015). Moreover, total payouts increased significantly after the 2007-2009 crisis, totaling $5.2 trillion
while reaching a maximum in 20182. In this study, based on agency and financial risk considerations, we
relate ESG reputational risk to the levels of payouts as well as the payout mix.
Agency theory suggests that managers, if left to their own devices, have the tendency to waste
corporate resources to gain non-pecuniary benefits, thus damaging shareholder value (Jensen and
Meckling, 1976; Richardson, 2006; Dittmar and Mahrt-Smith, 2007). However, ESG mitigates
shareholders’ agency-related concerns as it signifies ‘good governance’ and relates to higher firm value,
productivity and profitability (Edmans, 2012; Ferrell et al., 2016; Dyck et al., 2019, Liang et al, 2022).
Moreover, Gomes (2000) argues that a good managerial reputation in terms of not extracting private
benefits can alleviate agency-related inefficiencies and have a positive impact on share price performance.
In contrast, high ESG reputation risk signifies ESG-related misconduct and is likely to be
associated to managerial self-serving behavior, harmful to various stakeholder groups. Corporate payouts
via dividends and/or share repurchases restrain behavior by reducing assets under managerial control
while increasing the likelihood of external financing and the subsequent strict market scrutiny and
monitoring (Easterbrook 1984; Jensen 1986). Nevertheless, Oswald and Young (2008) underline that self-
interested manager dispense cash in the presence of incentive alignment monitoring mechanisms.
Therefore, we hypothesize that increased ESG reputational risk is related to higher payouts when better
incentive alignment mechanisms are in place. Moreover, ESG reputational risk can be linked to corporate
payouts through its impact on financial risk.
2
See a report by Deloitte https://www2.deloitte.com/us/en/insights/economy/spotlight/economics-insights-analysis-03-
2019.html

ESG-related performance cultivates trust between investors and managers, thereby reducing
adverse selection costs, and consequently eases access to external financing (Kim et al., 2012; Lopatta et
al., 2016). On the other hand, ESG reputational risk is expected to have the opposite effect. Kolbel et al.
(2017) suggest that reputation risk is likely to lead to stakeholder sanctions, thus increasing financial risk.
At this point, it is important to note that the composition of the payout mix has direct implications for
firms’ financial flexibility and can serve as a risk management device (Bonaime et al, 2014).
Flexibility is a key characteristic that differentiates dividends from share repurchases (Allen and
Michaely, 2003; Brav et al. 2005; Bonaime et al. 2014). In the corporate finance literature, dividends are
often coined as ‘sticky’ due to the well-documented managerial hesitation to reduce dividends. On the
other end of the flexibility spectrum, share repurchases are sporadic. Share repurchase reductions do not
trigger adverse market reactions, nor are share repurchase announcements legally binding. These
diametrically opposed features carry both advantages and disadvantages. To the extent that ESG
reputational risk represents agency costs, the quasi-fixed cost nature of dividends renders this payout
method more effective vis-à-vis repurchases as dividends represent an ongoing commitment to pay out
cash. In contrast, the flexibility of share repurchases gives self-interested managers the opportunity to omit
payouts and dissipate the reserved cash. Nevertheless, the said flexibility can be a valuable tool in cases
where external financing is problematic as firms can curtail share repurchases to secure sufficient
investment funds (Brav et al. 2005; Bliss et al. 2015). Therefore, to the extent that ESG reputational risk
increases financing risk, we would expect that firms employ a payout mix that favors share repurchases.
It appears that ESG reputational risk can influence payout levels and the payout mix through two channels,
which warrants an empirical investigation.
Considering our research objective, the first part of our empirical analysis explores the effect of
ESG reputational risk on payout levels and the payout composition. We proxy ESG reputational risk with

RepRisk’s RRI index (RRI) and we regress firm total payouts (dividends plus share repurchases) and
payout mix (repurchases over total payouts) on RRI and a vector of controls. After correcting for
endogeneity and self-selection, we document that ESG reputational risk induces higher payouts through a
more flexible payout mix – one that favors share repurchases. To further understand these relationships,
we stratify firms into subsamples according to levels of monitoring mechanisms and financial constraints.
We document that the effect of ESG reputational risk on corporate payouts (the payout mix) is more
pronounced in the presence of strong monitoring mechanisms (financial constraints). The second part of
our analysis explores the association between ESG reputational risk and firm value through its impact on
payouts. Accordingly, we employ the valuation regression (Fama and French 1988; Pinkowitz et al. 2006)
as well as the approach by Faulkender et al. (2006) and use excess stock returns to assess the changes in
firm value. Results from both approaches show that shareholders value distributions from high ESG
reputational risk firms comparatively more.
In summary, our findings indicate that ESG reputational risk influences both the levels and the
mix of corporate payouts. Consistent with our hypotheses, results suggest that i) ESG reputational risk
represents agency costs and that such firms relate to higher total payouts (dividends and share repurchases)
and ii) ESG reputational risk raises financial risk, and this elicits a more flexible payout mix. As a final
point, we document the market places a premium on payouts from higher ESG reputational risk firms.
This in line with our hypotheses that investors value payouts at a premium in firms where cash are expected
to be wasted in managerial self-serving endeavors.
This study makes several contributions to the literature. First, our results establish a link between
ESG reputational risk and financial decision making. Specifically, our findings uncover the role of ESG
reputational risk in shaping corporate payouts, advancing our understanding of payout policy. Second, our
study exemplifies multi-faceted role of payout policy in addressing market frictions. Namely, our findings

exemplify the adoption of a more flexible payout regime as a risk management device (Bonaime et al.
2014), namely financial risk induced from ESG reputational risk. Moreover, this study showcases
increased corporate distributions as an agency cost mitigating tool (Easterbrook 1984; Jensen 1986).
Third, our findings document the impact of reputation risk on firm value through its impact on payouts.
From a managerial perspective, this demonstrates that investors acknowledge ESG reputational risk in
valuations of financial policies. Thus, managers should take heed of ESG reputational risk in their strategic
decision-making.
Our study relates to the body of work that links ESG to a several firm characteristics and financial
decisions such as ‘’good governance’’, firm value, profitability, agency issues and financial risk (Benabou
and Tirole, 2010; Edmans, 2012; Servaes and Tamayo, 2014; Eccles et al., 2014; Ferrell et al., 2016;
Albuquerque et al., 2019). We extend this work by linking ESG reputational risk to payout policy
considering that corporate payouts may serve both as an agency cost - mitigating tool and a risk
management device (Easterbrook, 1984; Jensen 1988; Oswald and Young 2008; Bonaime et al. 2014).
Our findings also extend the study of Chang et al. (2019), which documents a positive direct and indirect
relationships between ESG and firms’ cash holdings.
The remainder of this study proceeds as follows. Section 2 reviews the ESG and payout policy
related literature, Section 3 describes the data and presents the research methodology. Section 4 discusses
the results. Section 5 summarizes the findings and concludes.
2. Literature review and hypotheses development
2.1 ESG reputational risk
The literature has established theoretical and empirical links between ESG and firms’ stock market
performance, corporate decisions, and corporate finance outcomes. A first strand of this literature
documents a positive link (Crifo et al., 2016; Ferrel et al., 2016; Starks et al. 2017; Lins et al., 2017; Dyck

et al. 2019; Hartzmark and Sussman, 2019; Baker et al., 2021), while a second supports that the relation
is neutral or even negative (Dutordoir et al. 2018; Freiberg et al., 2019). A third stand focuses on the
relation between ESG and firms’ performance with several studies arguing for a positive relationship
(Gillan et al 2021). On the other hand, Brammer et al. (2006) report a negative association, while Galema
et al. (2008) argue that there is no connection. We argue that ESG reputational risk and corporate payouts
have a positive relationship, which is amplified in the presence of strong monitoring mechanisms.
We conjecture the following potential explanations for the impact of ESG reputational risk in
corporate payout decisions. From the stakeholder’s value maximization point of view, ESG performance
is associated with less agency costs. This association is supported by the better alignment of interests
between managers, shareholders, and other stakeholders when governance is more efficient (Hart and
Zingales, 2017). In addition, firms with low ESG reputational risk are well-governed, have increased value
(Benabou and Tirole, 2010) enjoy social acceptance and generate profits (Edmans, 2012; Ferrell et al.,
2016; Dyck et al., 2019), thereby alleviating investor concerns by reducing agency costs. Another
protentional explanation may arise from the fact that ESG reputational risk is an important factor that can
moderate the adverse selection costs related to equity issuance by decreasing the information asymmetry
between investors and managers and stakeholders (Kim et al., 2012; Lopatta et al., 2016).
Regardless of the importance of ESG reputational risk and its impact on firms’ stock market,
corporate and financial decision-making, the extant research has not yet examined the effect of the ESG
reputational risk on firms’ payout decisions. Our study aims to fill this research gap.
2.2 Corporate payout policy
The determination of the payout policy is a fundamental managerial duty. The need to reevaluate the
payout decision over time as well as the significant amounts of funds involved underline its importance to
managers and investors alike. Accordingly, payout decisions and their impact on firm value have been a

focal point in the corporate finance literature. Since the dividend irrelevance theorem (Modigliani and
Miller, 1958), advancements in payout-related research have provided valuable insights into payout
decisions, rendering payout policy value-relevant. Specifically, numerous studies emphasize the use of
corporate payouts as a tool to mitigate agency costs (Jensen and Meckling, 1979; Jensen, 1986;
Easterbrook, 1984; Oswald and Young, 2008), a signaling mechanism (Miller and Rock, 1985; Ofer and
Thakor, 1987; Amihud and Murgia, 1997) and a risk-management device (Bonaime et al., 2014; Arena
and Julio 2021). A related strand of the literature, motivated by the phenomenal rise of share repurchases,
compares and contrasts this payout mechanism to traditional cash dividends.
Historically, corporate earnings were distributed via cash dividends. However, the deregulation of
share repurchases in 1982 led to a significant shift in the payout practices of US-listed firms. After 2000,
US firms engaged in significant share repurchase activity, both in terms of rate and scale. Share
repurchases became the dominant payout method as they are employed by the majority of US firms and
at an aggregate level, with distributions via repurchases surpassing traditional cash dividends for several
years between 2000 and 2020 (Skinner, 2008; Floyd, 2015; Deloitte, 2019). This remarkable shift in
payout policy has brought share repurchases under the spotlight, and consequent research has managed to
uncover several motives for share repurchases. Often drawing from the dividend-related literature,
research has revealed that share repurchases are used to signal stock undervaluation, to help firms exploit
stock undervaluation, to offset the dilutionary effect of stock options on key performance metrics (i.e.,
EPS), and to distribute free cash flows in a more tax-efficient and flexible way (Jagannathan et al., 2000;
Kahle, 2002; Brav et al. 2005; Skinner, 2008; Bliss et al., 2015). The flexibility of share repurchases
constitutes a distinct trait of this payout method, which associates their use with other financial decisions
such as capital investment and risk management.

Share repurchases, contrary to the rigidity or ‘stickiness’ of dividends, are inherently flexible.
Share repurchase announcements do not represent a legal commitment. Moreover, repurchase
intermittency and relevant reductions and omissions are not punished by the market with a drop in the
share price, as is the case with dividends. Consequently, managers unlike dividend payouts do not perceive
repurchases as a commitment. This provides management with the opportunity to coordinate share
repurchase activity for investment needs. If firms do not have sufficient investment capital and are unable
or unwilling to tap into external financing, then repurchases are scaled back. Consistent with this notion,
Bonaimé et al. (2014) document that the flexibility of the payout mix, as measured by the relative portion
of share repurchases over total payouts, and financial hedging are substitute risk management tools. The
dominance of repurchases can be accredited, at least to some extent, to their flexible nature.
2.3 Hypotheses development
In this section, we relate ESG reputational risk to corporate payouts and develop two sets of empirically
testable hypotheses. Our main argument is that ESG reputational risk reflects an increase in both agency
issues and financial risk. Consequently, we theorize that firms mitigate these issues by choosing
appropriate composition and intensity of the payout mix.
Several studies argue that ESG reflects ‘good governance’ and that, as a result, it relates to higher
firm value, productivity, and profitability (Edmans, 2012; Ferrell et al., 2016; Dyck et al., 2019), and thus
lower shareholders’ agency-related concerns. Moreover, Gomes (2000) argues that a good managerial
reputation in terms of not extracting private benefits can alleviate agency-related inefficiencies and have
a positive impact on share price performance. Conversely, ESG reputational risk is expected to have a
diametrically opposed effect, as it may signify agency issues. Specifically, ESG reputational risk stems
from ESG-related misconduct. The resulting damage to perceived reputation suggests agency problems as
such misconduct is likely to originate from managerial self-serving behavior that is harmful to various

stakeholders. Additionally, such misconduct can also suggest an increase in scope for such self-serving
behavior.
Jensen (1986) suggests that the existence of free cash flows elevates such concerns. In cases like
this, dividends and share repurchase can be valuable tools for protecting shareholder wealth. Corporate
distributions directly limit resources that can be wasted under managerial control, while making it likely
that the firm will need to tap into the capital markets and thus be subject to strict market scrutiny
(Easterbrook, 1984; Jensen, 1986). Thus, we expect that firms with higher ESG reputational risk firms
will exhibit higher payouts vis-à-vis their low-risk counterparts. Nevertheless, Oswald and Young (2008)
point out that the presence of free cash flows is not sufficient to stimulate corporate disbursements. Self-
interested managers are more likely to agree to pay out cash in the presence of monitoring mechanisms.
Therefore, we expect that increased ESG reputational risk is related to higher payouts when better
monitoring mechanisms are in place. Considering the discussion in this paragraph, we form the following
set of hypotheses:
H1: There is a positive relationship between ESG reputational risk and corporate payouts.
H2: The positive relationship between ESG reputational risk and corporate payouts is amplified in the
presence of incentive alignment monitoring mechanisms.
Good ESG performance can facilitate external financing as it may nurture trust between investors
and managers, consequently reducing adverse selection costs (Kim et al., 2012; Lopatta et al., 2016). On
the contrary, ESG reputational risk increases financial risk. Specifically, ESG misdeeds are likely to
induce stakeholder sanctions, thus increasing the risk of future cash shortfalls (Kolbel et al., 2017). Firms
often adjust their financial decisions to defend against such risk. For example, enterprises may also
preserve high cash balances as a precautionary move against such risk (Almeida et al., 2004).
10

The extant literature provides evidence that the composition of the payout mix can amplify or lessen
financial risk.
In the US, corporate distributions take mainly the form of cash dividends and open market share
repurchases. A fundamental risk-related characteristic in which these two forms of payout differ is their
financial flexibility (Allen and Michaely, 2003; Brav et al. 2005; Bonaime et al 2014; Arena and Hulio
2021). Managerial perceptions regarding the stability of dividends are well-documented (Lintner 1956;
Dhanani, 2005). On the one hand, dividends are rigid due to the great value that managers place on
dividends stability and their reluctance for dividends omissions and reductions. Alternative, the market
does not react unfavorably to share repurchases reduction, nor are their announcements legally binding.
The intermittent use of share repurchases underlines their inherent flexibility, which constitutes a valuable
tool in the presence of financial risk. Specifically, managers can consider the financing needs and adjust
their share repurchase activity accordingly (Brav et al. 2005; Bliss et al. 2015). In this respect, Bonaime
et al. (2014) exemplify the use of share repurchases as a risk management device. Their findings show
that a more flexible payout mix, one that favors share repurchases over dividends, substitutes for a firm’s
level of financial hedging and vice versa.
Therefore, to the extent that ESG reputational risk increases financial risk, we would expect that
firms choose a payout mix that favors share repurchases over dividends. Thus, we form the following set
of hypotheses:
H3: There is a positive relationship between ESG reputational risk and the flexibility of the payout mix.
H4: The positive relationship between ESG reputational risk and the flexibility of the payout mix is
amplified in the presence of financial constraints.
11

Finally, we argue that ESG reputational risk influences firm value through its impact on payout.
Dittmar and Mahrt-Smith, (2007) document that the value of $1 ranges between $0.42 and $0.88 and that
good governance increases the corresponding value twofold. The notion behind this valuation differential
is that cash are expected to be squandered in private benefits in the poor governance firms. In a similar
vein, Pinkowitz et al (2006) argues dividends should be valued at a premium in cases where cash are
expected to be wasted due managerial self-serving behavior. In this study we posit that ESG reputational
risk denotes agency issues and thus the market expects cash in high ESG reputational risk firms to be
wasted in private benefits. Therefore, we hypothesize that total payouts, which reduce resources under
managerial control, should be valued at a premium in high ESG reputational risk firms in comparison to
low ESG reputational risk firms. Specifically:
H5: The market valuation of corporate payouts is higher (lower) in high (low) ESG reputational risk
firms.
3. Data and empirical methodology
3.1 Sample construction and sources
We construct our sample using a range of sources. We retrieve firm-level financial data from the
Compustat Fundamental Annual, Institutional Brokers' Estimate System (IBES) and Thomson/Refinitiv
databases. ESG reputational risk data are obtained from the RepRisk Global Business Intelligence
Database for the period between January 2007 and December 2019. From the merged sample, we exclude
financial firms and utility sectors (SIC codes 6000-6999 and 4900-4999, respectively). Also, we discard
the observations with missing values for our baseline models (see equation 1 and equation 2). Our final
sample with available ESG reputational risk information is an unbalanced panel of 13,113 firm-year
observations from 2,021 firms. To avoid selection and survivorship bias, we do not convert our final
12

sample into a balanced panel. All variables are winsorized at the conventional 1st and 99th percentiles to
reduce the protentional impact of outliers.
3.2 ESG reputational risk measurement
We retrieve firm-level data on ESG reputational risk from the RepRisk Global Business Intelligence
Database, which is considered the biggest database that monitors firm-specific ESG issues that may impact
firms’ reputations on a global scale. The database follows an outside-inside approach3 by using machine
learning algorithms and daily screening of over 100,000 public sources, media outlets, and stakeholders.
RepRisk quantifies a company’s actual ESG reputational risk by focusing on 28 ESG-related issues3
according to international standards. In addition, RepRisk covers 67 ESG-related Topic Tags3, which are
an extension of RepRisk’s core research. The database quantifies firms’ exposure to ESG issues and
provides an index (RRI current) that reflects the current level of a company’s reputational exposure. In
addition, RepRisk provides a second index (RRI peek) that captures companies’ ESG-related incidents for
the last two years. Both indexes range from 0 (lowest ESG reputational risk) to 100 (highest ESG
reputational risk), considering exposure to ESG aspects.
3.3 Methodology
3.3.1 Research design – ESG reputational risk and the corporate payout mix
In this section, we present our methodology regarding the impact of ESG reputational risk on firms’ payout
mix. To test our hypotheses H1 and H3, we regress payout flexibility on ESG reputational risk including a
vector of the control variables. Thus, to test our hypotheses H1 and H3, we estimate the following models:
𝑃𝑎𝑦𝑜𝑢𝑡𝑠𝑖,𝑡 = 𝑎0 + 𝑎1 𝐸𝑆𝐺𝑅𝑒𝑝𝑅𝑖𝑠𝑘𝑖,𝑡 + 𝑎2 𝑍𝑖,𝑡 + 𝑓𝑖𝑟𝑚𝑖 + 𝑦𝑒𝑎𝑟𝑡 + 𝑢 𝜄,𝑡 (Eq.1)
3 The information is available on the documentation and practices at: https://www.reprisk.com.
13

𝑅𝑒𝑝%𝑖,𝑡 = 𝑏0 + 𝑏1 𝐸𝑆𝐺𝑅𝑒𝑝𝑅𝑖𝑠𝑘𝑖,𝑡 + 𝑏2 𝑍𝑖,𝑡 + 𝑓𝑖𝑟𝑚𝑖 + 𝑦𝑒𝑎𝑟𝑡 + 𝑢′ 𝜄,𝑡 (Eq.2)
Where, Payouts is the share of firm’s total payouts scaled over total assets, Rep% is the composition of
the payout mix measured as share repurchases scaled by the sum of share repurchases plus dividends
(Bonaimé et al. 2014), ESGRepRisk is firms’ ESG reputational risk and Z is a vector of control variables.
We include (firm) and (year) variables to control for time-invariant firm-specific heterogeneity and time-
fixed effects, respectively, while u is the disturbance term. If hypotheses H1 and H3 are valid, then 𝑎1 and
𝑏1 should be positive and statistically significant. To test H2 and H4, we split firm-years into subsamples
of high/low monitoring and financial constraints. For H2 and H4 to hold, the coefficient of 𝐸𝑆𝐺𝑅𝑒𝑝𝑅𝑖𝑠𝑘
should be larger in the high monitoring and financial constraints subsamples.
As a robustness check, we use two alternative measures for ESG reputational risk (ESGRepRisk).
Specifically, we use RepRisks’ (CurrentRRI) and (PeakRRI) to capture a company’s current exposure to
ESG-related issues and over a maximum period of two years, respectively. In addition, following the
extant literature on payout determinants (Rozeff, 1982; Jensen, 1986; Dittmar, 2000; Bens et al., 2003;
Oswald and Young, 2008; Blouin et al., 2011; Gaspar et al. 2013; Bonaimé et al. 2014; Almeida et al.,
2016; Arena and Julio 2021), we include in our regression a rich set of controls. In line with Jensen’s
(1986) free cash flow theory, we control for free cash flows (FreeCashFlows). We control for asymmetric
information by including (FirmSize). Following Rozeff (1982), we include cash flow volatility
(CashFlowVol) and Tobins’ Q (TobinsQ) to capture firms’ risk and growth opportunities, respectively. In
addition, we control for financial leverage (Leverage) to control for alternative mechanisms to reduce
agency issues. Finally, we include firms’ age (Denis and Osobov, 2008; Blouin et al, 2011) and
institutional holdings (InstitutionalHoldings) to account for life-cycle theories and dividend clienteles,
respectively.
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3.3.2 Addressing endogeneity
Regarding our baseline models (Eq. 1 & Eq. 2) we consider three potential causes of endogeneity,
specifically, reverse causality, omitted variables, and measurement error. First reverse causality may be
an issue since low payout firms, ceteris paribus, have more capital available to fund socially responsible
investment, thus reducing ESG reputation risk. Second, despite controlling for well-known determinants
of payout policy in Eq.1 and Eq.2. omitted variable bias may be present due to an uncontrolled
confounding variable, i.e., one is correlated with both ESG reputational risk and with the error term. Third,
while ESG reputation risk is constructed by RepRisk using a sophisticated algorithm that dynamically
captures and quantifies a company’s or project’s reputational risk exposure to ESG issues, it may still
contain some measurement error. Thus, in addition to our baseline estimation approach, we also employ
three additional techniques to address potential endogeneity between ESG reputation risk and payout
policy.
We first use an instrumental variable (IV) approach and perform 2SLS estimations. To this end,
we address the potential endogeneity that may arise from reverse causality, omitted variables and
measurement error. The instruments we choose are the firm’s industry average scores of ESG reputational
risk (three-digit SIC code) in a given year. The motivation and construction of the instrument closely
follow prior studies (e.g., El Ghoul et al., 2011; Chang et al., 2019), which suggests that same industry
firms are more likely to be exposed to similar ESG risks.
Moreover, we use heteroskedasticity-based instruments as suggested by Lewbel (2012). This
methodology is used in regression models with endogenous regressors to identify the structural parameters
in the absence of external instruments. To achieve identification this method requires regressors to be not
correlated with the product of heteroskedastic errors, which is the case in models where error correlations
stem from an unobserved common factor. Lewbel’s (2012) instruments are generated from the existing
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model and specifically by utilizing heterogeneity in the error term of the 1st-stage regression. This
econometric technique can be used when external instruments are unavailable or as a supplement to
external instruments to improve the efficiency of the IV estimator.
The first stage of our approach includes a regression of the instrument including the control
variables on the firm’s ESG reputational risk, while in the second stage we regress firms’ payout variables,
wherein we regress firm investment on the first-stage residuals, including the former control variables.
Both the first and second stages of our instrumental approach (IV) are provided below:
𝐸𝑆𝐺𝑖,𝑡 = 𝑎0 + 𝑎1 𝐼𝑛𝑠𝑡𝑟𝑢𝑚𝑒𝑛𝑡𝑖,𝑡 + 𝑎2 𝑍𝑖,𝑡 + 𝑓𝑖𝑟𝑚𝑖 + 𝑦𝑒𝑎𝑟𝑡 + 𝑢 𝜄,𝑡 (Eq.3)
Total𝑃𝑎𝑦𝑜𝑢𝑡𝑠𝑖,𝑡 = 𝑎0 + 𝑎1 𝑃𝑟𝑒𝑑𝑖𝑐𝑡𝑒𝑑(𝐸𝑆𝐺)𝑖,𝑡 + 𝑎2 𝑍𝑖,𝑡 + 𝑓𝑖𝑟𝑚𝑖 + 𝑦𝑒𝑎𝑟𝑡 + 𝑢 𝜄,𝑡 (Eq.4)
𝑅𝑒𝑝%𝑖,𝑡 = 𝑎0 + 𝑎1 𝑃𝑟𝑒𝑑𝑖𝑐𝑡𝑒𝑑(𝐸𝑆𝐺)𝑖,𝑡 + 𝑎2 𝑍𝑖,𝑡 + 𝑓𝑖𝑟𝑚𝑖 + 𝑦𝑒𝑎𝑟𝑡 + 𝑢′ 𝜄,𝑡 (Eq.5)
As an alternative approach to address the endogeneity concern, we utilize entropy-balancing
regressions (Hainmueller, 2012). This is a preprocessing method which utilizes a reweighting scheme to
calibrate unit weights in order to equalize the distribution moments between the treatment and control
sample. In doing so, entropy balancing improves covariate balance and reduces loss of information as it
does not ‘match or discard’ each unit as is the case with propensity-score matching techniques.
3.3.3 Heckman selection model
To further support our findings, we account for sample selection mechanisms that may affect the
validity of our baseline results. In doing so, we address possible sample selection and omitted variable
bias that may lead to a non-zero covariance between the ESG reputational risk and the random error in
our baseline model by applying the two-stage Heckman (1979) model. Our motivation is to explore
whether firms with certain characteristics are more prone to ESG reputational risk. Latent variables that
may influence ESG reputational risk may also affect firms’ payout activity. In this case, the coefficient on
ESG reputational risk may be overestimated upwards. The first stage of the model uses a probit regression
16

to estimate the probability of a firm having ESG reputational risk above the sample average
(High_ESG_Risk). The second stage reforms and incorporates in the estimation the individual predicted
probabilities to correct for the possibility of self-selection. The selection equation has the following form:
∗
𝐷𝐼𝑖,𝑡 = 𝑘 𝛧𝑖,𝑡 + 𝜀𝜄,𝑡 (Eq.6)
∗
1, 𝑖𝑓 𝐻𝑖𝑔ℎ_𝐸𝑆𝐺_𝑅𝑖𝑠𝑘𝑖,𝑡
where: 𝐷𝐼𝑖,𝑡 = { ∗
0, 𝑖𝑓 𝐿𝑜𝑤_𝐸𝑆𝐺_𝑅𝑖𝑠𝑘𝑖,𝑡
Where 𝐷𝐼𝑖∗ is dummy latent variable that captures the intensity of ESG reputational risk, 𝑘 is a
vector of the coefficients to be estimated, 𝛧𝑖,𝑡 is a set of predictor variables of 𝐷𝐼𝑖,𝑡 based on the extant
literature, and 𝜀𝜄,𝑡 is the error term. More specifically, we include all explanatory variables of our initial
setup and a number of additional variables that are the exclusion restrictions. By doing so, we account for
any selection bias on ESG reputational risk that may arise from these restrictions. Following the extant
literature, we use as exclusion restrictions the average of ESG reputational risk of the industry to which a
company belongs (StateSectorMeanRRI), the religion ranking (StateReligion) (Angelidis and Ibrahim,
2004), the political orientation (StatePoliticalOrientation) (Rubin, 2001) of the state in which the firm
belongs, and the firm’s managerial ability (ManagerialAbility) (Demerjan, 2012). We assume that our
chosen instruments are associated firms’ ESG reputational risk and are not related to the firms’ payout
policy. To address potential self-selection bias, we construct equations 6 and 7 for firms with high ESG
reputational risk and low ESG reputational risk, respectively.
𝜑(𝜔′𝛢)
𝐸[𝑇𝑜𝑡𝑎𝑙𝑃𝑎𝑦𝑜𝑢𝑡𝑠 | 𝐷𝐼𝑖,𝑡 = 1] = 𝛽′𝛸 + 𝛿 + 𝛦[𝑒 | 𝐷𝐼𝑖,𝑡 = 1] = 𝛽′𝛸 + 𝛿 + 𝜌𝜎𝑒 𝛷(𝜔′𝛢) (Eq.7)
−𝜑(𝜔′𝛢)
𝐸[𝑃𝑎𝑦𝑜𝑢𝑡𝑠| 𝐷𝐼𝑖,𝑡 = 0] = 𝛽′𝛸 + 𝜌𝜎𝑒 1−𝛷(𝜔′𝛢) (Eq.8)
We subtract equation 8 from equation 7 to capture the expected impact of ESG reputational risk on the
level of payouts.
17

𝜑(𝜔′𝛢)
𝐸[𝑇𝑜𝑡𝑎𝑙𝑃𝑎𝑦𝑜𝑢𝑡𝑠 | 𝐷𝐼𝑖,𝑡 = 1] − 𝐸[𝑇𝑜𝑡𝑎𝑙𝑃𝑎𝑦𝑜𝑢𝑡𝑠 | 𝐷𝐼𝑖,𝑡 = 0] = 𝛿 + 𝜌𝜎𝑒 𝛷(𝜔′𝛢)(1−𝛷(𝜔′𝛢)) (Eq.9)
where 𝜔′ is defined as a vector of coefficients to be estimated (also denoted by ω in equation 7), φ signifies
the distribution function of the standard normal distribution, and Φ signifies the distribution function of
the cumulative distribution function.
Equation 8 provides information on the effect of ESG reputational risk on the firms’ payout
distribution via the δ coefficient, which is related to the b1 coefficient of equation 1. The potential selection
bias can be addressed through the inverse Mills ratio (IMR), which is a correction term on the condition
that ESG reputational risk is positive. The IMR is calculated as follows:
𝜑(𝜔′𝛢) −𝜑(𝜔′𝛢)
𝐼𝑀𝑅 = 𝛷(𝜔′𝛢) 𝑖𝑓 𝐷𝐼𝑖,𝑡 = 1 or 𝐼𝑀𝑅 = 1−𝛷(𝜔′𝛢) 𝑖𝑓 𝐷𝐼𝑖,𝑡 = 0 (Eq.10)
3.3.4 ESG reputational risk, payout, and firm value – value regression specification
Following Fama and French (1998) and Pinkowitz et al. (2006), we use an econometric design that
allows us to relate a firm’s payout policy with several characteristics. We estimate the following equation
to capture the relationship between ESG reputational risk and firms’ payouts distribution.
ΜarketValuei,t = α + β1 Earningsi,t + β2ΔEarningsi,t + β3Δearningsi,t+1 + β4ΔnetAssetsi,t + β5ΔnetAssetsi,t+1 + β6R&Di,t
+β7ΔR&Di,t +β8ΔR&Di,t+1 +β9Interesti,t +β10Δinteresti,t +β11Δinteresti,t+1 +β12Payoutsi,t + β13Δpayoutsi,t +
β14Δpayoutsi,t+1 + β15ΔμarketValuei,t+1 + β16Cashi,t + β17Δcashi,t+1 +𝑦𝑒𝑎𝑟 + 𝑓𝑖𝑟𝑚 εi,t (Eq.11)
The variable Xt represents the level of variable X in year t over the level of assets in year t and dXt
is the change in the level of X from year t−1 to year t, divided by the total assets in year t. The variable
dXt+1 captures the change in the level of X from year t to year t+1 divided by the total assets in year t.
The variable MarketValue expresses firms’ market value at the end of the fiscal year, Earnings represents
its earnings before extraordinary items plus interest, deferred tax credits, and investment tax credits, A is
18

firms’ total assets, R&D4 is the firms’ research and development expenses, I is the interest expense, and
Payouts is share repurchases plus common dividends paid. NetAssets is net assets, calculated as total assets
minus cash. Interest represents interest expense, Cash is liquid assets, measured by cash and cash
equivalents, while CurrentRRI and PeakRRI are our two proxies for ESG reputational risk.
3.3.5 ESG reputational risk, payout, and firm value – alternative specification
We further investigate the relationship between ESG reputational risk and firm value through its
impact on payouts, following the approach of Faulkender et al. (2006), and use excess stock returns to
assess changes in firm value. Specifically, we estimate equation 12 below:
𝐵 𝛥𝐶𝑎𝑠ℎ 𝛥𝑃𝑎𝑦𝑜𝑢𝑡𝑠𝑖,𝑡
𝑟𝑖,𝑡 –𝑅𝑖,𝑡 = 𝑏1 𝐷𝑢𝑚𝑚𝑦𝐶𝑢𝑟𝑟𝑒𝑛𝑡𝑅𝑅𝐼𝑖𝑡 + 𝑏2 𝑀𝑉 + 𝑏3 𝐷𝑢𝑚𝑚𝑦𝐶𝑢𝑟𝑟𝑒𝑛𝑡𝑅𝑅𝐼 𝑖𝑡 +
𝑖,𝑡−1 𝑀𝑉𝑖,𝑡−1
𝛥𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠𝑖,𝑡 𝑁𝑒𝑡𝐴𝑠𝑠𝑒𝑡𝑠𝑖,𝑡 𝛥𝑅&𝐷𝑖,𝑡 𝛥𝐶𝑎𝑠ℎ𝑖,𝑡 𝛥𝑃𝑎𝑦𝑜𝑢𝑡𝑠𝑖,𝑡 𝛥𝐶𝑎𝑠ℎ𝑖,𝑡 𝛥𝐶𝑎𝑠ℎ𝑖,𝑡

𝑏4 + 𝑏5 + 𝑏6 𝑀𝑉 + 𝑏7 + 𝑏8 + 𝑏9 + 𝑏10 ∗
𝑀𝑉𝑖,𝑡−1 𝑀𝑉𝑖,𝑡−1 𝑖,𝑡−1 𝑀𝑉𝑖,𝑡−1 𝑀𝑉𝑖,𝑡−1 𝑀𝑉𝑖,𝑡−1 𝑀𝑉𝑖,𝑡−1
𝛥𝐶𝑎𝑠ℎ𝑖,𝑡 𝛥𝐶𝑎𝑠ℎ𝑖,𝑡 𝑁𝑒𝑡𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑛𝑔𝑖𝑡

+ 𝑏11 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑡 + 𝑏12 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖𝑡 ∗ + 𝑏13 ∗ + 𝑦𝑒𝑎𝑟 + 𝑓𝑖𝑟𝑚 + e
𝑀𝑉𝑖,𝑡−1 𝑀𝑉𝑖,𝑡−1 𝑀𝑉𝑖,𝑡−1
(Eq. 12)
𝐵
Where, 𝑟𝑖,𝑡 – 𝑅𝑖,𝑡 , is equal to a firm’s stock return from year t–1 to year t, minus the benchmark
𝐵
portfolio return (𝑅𝑖,𝑡 ,) of firm i from 25 Fama and French portfolios formed on firm size and book-to-
market ratio. DummyCurrentRRI (DummyPeakRRI) is an indicator variable that takes the value of one if
CurrentRRI (PeakRRI) is above the sample’s median and zero otherwise. All remaining variables except
stock returns are scaled by the lagged market value of equity MVt-1. Casht is cash plus short-term
investments. Earningst is earnings before extraordinary items plus interest, deferred tax credits and
investment tax credits, NAt is total assets minus cash, It is interest expense, TP is the total payout calculated
4
We set R&D equal to zero when it is missing. (Pinkowitz et al. 2006)
19

as the sum of cash dividends plus share repurchases, Leveraget is market leverage, NetFinancingt is net
financing, calculated as total equity issuance plus debt issuance minus repurchases minus debt redemption,
R&Dt is research and development expenditures set to zero if missing. Τhe generic notation ΔX signifies
the 1-year change, Xt -Xt-1.
3.4 Descriptive statistics
In table 1 we present the descriptive statistics of the variables used in the baseline regressions. In panel A,
we document that the average of TotalPayouts for our sample is 4.3% while the mean firm-year in our
sample has a repurchases to total payouts ratio (Rep%) of 48.9%. In terms of ESG reputational risk,
CurrentRRI (PeakRRI) ranges from 0 to 0.45 and has an average value of 0.085. The mean for the
FreeCashFlows variable in our sample is -0.05, suggesting that the average firm does not generate enough
cash flows from operations to maintain assets in place and fund expected investment. Moreover, the
Tobin's Q variable for the average firm is 1.967, indicating growth opportunities. In terms of Leverage,
the average value is 22.7%. Firm age (Age) ranges from 3 to 58 years, with a mean value of 27.33 years.
The cash flow volatility variable and firm size (Size) has an average value of 0.046 and $37.32 million
respectively. Finally, institutions hold 72.7% of the average firm.
Panel B presents the univariate test of difference in the means of the variables between high and
low ESG reputational risk, as proxied by (CurrentRRI). We find that firms with increased ESG
reputational risk exhibit higher total payouts and their composition of the payout mix favors share
repurchases. This is consistent with hypotheses H1 and H3 that ESG reputational risk stimulates higher
payouts under a more flexible payout mix.
20

In table 1 panel C, we present the correlations between all the variables used in our baseline
regressions (equations 1 and 2). In line with our expectations, the results show that both measures of ESG
reputational risk (CurrentRRI and PeakRRI) exhibit a positive and statistically significant correlation with
both TotalPayouts and Rep%. Moreover, both TotalPayouts and Rep%. are positively correlated with
FreeCashFlows, Age, Size and InstHoldings and negatively correlated with Leverage and CashFlowVol.
Moreover, to secure that the correlations are not spurious, we include a rich set of control variables in our
regression analysis.
4. Results
4.1 ESG reputational risk and total payouts
In Table 2 we present the estimation of equation 1. Columns 1-3 proxy for ESG reputational risk
with RepRisk’s CurrentRRI while columns 4-6 use PeakRRI as an alternative measure. We initially utilize
a between estimator (BE) to capture the cross-sectional variation (columns 1 and 5). The coefficients of
both proxies for ESG reputational risk are 0.044 and 0.029, both statistically significant at the 1% level.
However, to account for possible bias resulting from unobserved firm-specific heterogeneity, we also
employ a high-dimensional firm and year fixed-effects estimator (HDFE) (columns 3 and 7). The
respective coefficients are 0.012 and 0.011, which are also statistically significant at conventional levels.
Moreover, following Dittmar (2000) and Fenn and Liang (2001), in columns 2 and 6 we present the results
from the Tobit regressions. By using this estimator, we correct for censored observations, which in our
case result from the significant number of zero-payout observations in our sample. Our findings, document
a positive and statistically significant at the 1% level, impact of ESG reputational risk on total payouts and
equal to 0.042 and 0.016, depending on the proxy ESG reputational risk. Finally, we strongly balance our
sample and re-estimate the model using entropy balancing regressions (Hainmueller, 2012). Specifically,
we split firm-year observations into treatment (high ESG reputational risk) and control (low ESG
21

reputational risk) groups based on the median (ESG reputational risk) in each year. In Appendix Table A2
we report the entropy-balanced sample weights. Results reported in columns (4) and (8) also show a
statistically significant effect of ESG reputational risk on total payouts at the 1% level.
Our results show a strongly consistent positive relationship between ESG reputational risk and
total payouts. This relationship holds across both alternative proxies for ESG reputational risk and the
alternative estimation techniques. The BE results suggest this relationship to be driven by cross-sectional
variation, i.e., high ESG reputational risk firms exhibit higher payouts than low ESG reputational risk.
The firm-fixed effects estimations indicates that the positive relationship between ESG reputational risk
and total payouts holds over time for any given firm. Our results show strong support for H 1, suggesting
that ESG reputational risk reflects agency issues and that firms mitigate these issues by conducting higher
distributions to shareholders. Finally, our estimates from the strongly balanced matched sample suggest
that the positive relationship between ESG reputational risk is not driven by systematic inequalities.
In terms of the control variables, the positive relationship between FreeCashFlows, Age and total
payouts is in line with the agency theory of free cash flows. Agency costs are likely to be high in mature
firms and companies that generate high free cash flows. The market to book ratio appears to be positively
related to total payouts. It may be the case that higher growth opportunities reflect future profitability and
thus the ability of the firm to sustain future payouts, which is very important in the case of dividends.
4.2 ESG reputational risk and total payouts under different levels of monitoring
To further investigate the contention that agency considerations drive the ESG-reputational risk
positive relationship, we stratify our firms into subsamples considering strong and weak monitoring
mechanisms. We use two alternative proxies for monitoring mechanisms, namely the percentage of
institutional holdings and the level of market competition, measured by the Herfindahl-Hirschman Index
(measured at the second digit-SIC code). Oswald and Young (2008) document that institutional holdings
22

positively influence payouts when the risk of overinvestment is high. Moreover, payouts may be the
outcome of market competition whereby managers agree to pay out cash to reduce agency concerns. In
the presence of intense competition, the cost of overinvestment is higher and more likely to drive firms
out of the market (Shleifer and Vishny, 1997)
In Table 3 we present the relevant findings. The results support H2 as the relationship between ESG
reputational risk and total payouts is more evident when stronger monitoring mechanisms are in place.
This holds across the two alternative proxies for ESG reputational risk and monitoring mechanisms as
well as alternative estimation methods. These findings are in line with Oswald and Young (2008), who
argue that self-interested managers are more likely to accept disgorging cash in the presence of monitoring
mechanisms.
4.3 ESG reputational risk and the composition of the payout mix
Table 4 presents the results from estimating equation 2. We use CurrentRRI as a proxy for ESG
reputational risk and present the relevant results in columns 1-3. PeakRRI is used as an alternative proxy,
with the respective results displayed in columns 4-6. To address censored observations, unobserved firm-
specific heterogeneity and endogeneity concerns, we employ Tobit regressions, high-dimensional firm
fixed effects and entropy balancing regressions, respectively. We document a robust positive and
statistically significant relationship at conventional levels, between ESG reputational risk and the
flexibility of the payout mix across alternative proxies and estimation methods. The findings lend strong
support to H3 and are consistent with the argument that ESG reputational risk increases financial risk,
consequently steering firms towards a more flexible payout mix, one that favors repurchases over
dividends.
23

4.4 ESG reputational risk and the composition of the payout mix under different levels of financial
constraints
We argue that the relationship between ESG reputational risk and the composition of the payout mix is
more pronounced under different levels of financial constraints. To establish this contention further, we
stratify firms into relevant subsamples. To measure financial constraints, we employ the widely used
Kaplan and Zingales (1997) and indices Whited-Wu (2006). The results are presented in table 5 and
provide strong support for H4. Specifically, we document that the positive relationship between ESG
reputational risk and the flexibility of the payout mix is amplified in the presence of financial constraints.
This relationship holds for the two alternative measures of financial constraints and under different
estimators, namely, Tobit, high dimensional fixed effects and entropy balancing regressions. Our findings
are in line with Bonaime et al. (2014), who exemplify the use of payout flexibility as a risk management
device.
4.5 Robustness checks with the instrumental variables
To further secure our baseline estimations and eliminate possible endogeneity concerns, we follow
an instrumental variable approach. The instruments we use are the firm’s industry average scores of ESG
reputational risk (three-digit SIC code) in a given year and Lewbel’s (2012) heteroskedasticity-based
instruments.5 Table 6 reports the relevant results.
To assess instrument validity, we perform Kleibergen and Paap under-identification (LM statistic)
test to check whether the number of instruments is adequate compared to the number of endogenous
variables. If the p-value is lower than 0.05 and 0.1 the null hypothesis of under-identification is rejected
at the 5% and 10% levels, respectively. Moreover, to evaluate correlation between our instruments and
the error term we follow the Hansen over-identification test. Under the null hypothesis over-identifying
5
We have also used Lewbel’s (2012) heteroskedasticity-based instruments as a supplement to industry averages.
24

restrictions are valid, so to reject the null hypothesis at the 5% and 10% levels, we need a higher value
than 0.05 and 0.1 respectively. Finally, to assess our instruments explanatory power we utilize a weak
identification test. This test compares the critical values with those of the Cragg-Donald Wald F-statistic
and in the case of greater critical values, the instruments are weak and have no explanatory power.
In table 6 we present our estimates of the two-stage least squares method. Our findings, after
controlling for endogeneity, are in line with those of the baseline model reported in table 3 and table 5,
and thus provide further support for H1 and H3.
4.6 Robustness checks for self-selection
In table 7, having estimated the model, we document that after addressing self-selection a 1% increase in
ESG reputational risk relates to an increase in the share of total payouts over total assets by 3.7% to 2.8%.
The respective increase on share of repurchases over total assets is 11.9% to 9.5%, depending on the proxy
of ESG reputational risk we use. These findings on sample selection are in line with those of the baseline
models and provide further support for the positive relationship between firms’ ESG reputational risk and
the payout distribution.
4.7 ESG reputational risk, payout, and firm value – value regression specification
In this section, we explore the association between ESG reputational risk and firm value through
its impact on payouts. Following Fama and French (1998) and Pinkowitz et al. (2006), we estimate
equation 11 to capture the relationship between ESG reputational risk and firms’ payouts distribution.
We conjecture that ESG reputational risk signifies agency issues, thus cash in firms with high ESG
reputational risk is expected to be wasted through managerial self-serving endeavors. Therefore, total
payouts, which reduce resources under managerial control, should be valued at a premium in high ESG
reputational risk firms in comparison to low ESG reputational risk firms.
25

Table 8 presents the results from estimating equation 11. Columns 1 and 4 document the findings
from the estimation of equation 1 for the full sample, using CurrentRRI and PeakRRI, respectively.
Columns 2 and 3 (5 and 6) provide our findings considering subsamples with high and low ESG
reputational risk based on the median values of CurrentRRI (PeakRRI). For the full sample, we document
that ESG reputational risk has a negative impact on firm value. This finding suggests that market
valuations incorporate the risk exposure of firms to ESG issues. Moreover, the estimates confirm our
hypothesis (H5) regarding the market valuation differential of total payouts between high and low ESG
reputational risk firms. Representatively, a total payout rate of 1% of a firm’s total assets boosts firm value
by almost 5% in firms with high ESG reputational risk, a more than twofold effect compared to the
increase of 2.1% in the low ESG reputational risk sample.
4.8 ESG reputational risk, payout, and firm value – alternative specification
Following the approach of Faulkender et al. (2006), we further investigate the relationship between
ESG reputational risk and firm value through its impact on payouts by using excess stock returns to assess
changes in firm value. Specifically, we estimate (equation 12). We conjecture, that shareholders value
each marginal dollar of payout more when it is distributed by firms with high ESG reputation risk (H5).
To investigate the latter hypothesis, we estimate equation 12.
We display our findings in table 9. Columns 1 and 3 estimate equation 1 using CurrentRRI and
PeakRRI as a proxy for ESG reputational risk, respectively. In columns 2 and 4, we re-estimate our model
using an entropy-matched sample. Our findings are in the same direction as those of table 8, produced by
the value regression of Fama and French (1998). Specifically, the estimates show that the coefficient of
the cross term between 𝛥𝑃𝑎𝑦𝑜𝑢𝑡𝑠𝑖,𝑡 and both (DummyCurrentRRI) and (DummyPeakRRI) is positive and
statistically significant, suggesting that the market values each dollar of payout more if it is distributed by
firms with high ESG reputational risk. This confirms hypothesis (H5) that firms with high ESG reputational
26

risk face increased agency issues. Accordingly, total payouts, a mechanism to reduce agency costs, are
comparatively more valued in such firms.
5. Conclusion
In this study, we investigated the ESG reputational risk-payout policy nexus motivated by the
increased attention that is being placed on corporate ESG by both corporations and researchers. By doing
so, we extend the recent corporate ESG literature on payout policy, addressing the relevant gap in the
literature. Specifically, we develop theoretical links between ESG reputational risk and payout levels as
well as the composition of the payout mix based on several research findings.
We provide robust evidence that higher ESG reputational risk affects both the level of payouts as
well as the composition of the payout mix. Initially, we regress total payouts and the composition of the
payout mix (repurchases to total payouts) on ESG reputational risk, including a rich set of control
variables. We establish a positive relationship between ESG reputational risk and both aspects of payout
policy that endure after employing an array of estimation methods to address potential endogeneity, self-
selection, and censored observations. Consequently, we stratify firms into subsamples according to the
strength of the monitoring mechanisms and the degree of financial constraints. We document that the
effect of ESG reputational risk on total payouts and the composition of the payout mix is more evident in
the presence of strong monitoring mechanisms and higher financial constraints, respectively. Thus, we
provide evidence that ESG reputational risk reflects agency costs, in line with the agency theory of free
cash flows, that respond by disgorging cash. In line with this contention, the presence of strong monitoring
mechanisms facilitate this behavior. Our findings reveal that ESG reputational risk raises financial risk
and firms employ a more flexible payout mix as a countermeasure. In further support of this notion, higher
levels of financial constraints amplify this relationship.
27

Finally, to gain further insight into the ESG reputational risk-payout nexus, we assess the impact
of reputation risk on firm value through its impact on payouts. We utilize two alternative methodologies,
namely the Fama and French (1998) value regression and Faulkender et al. (2006) excess return approach
and document that the market places a premium on payouts made by firms with higher ESG reputational
risk. This lends further support to the notion that ESG reputational risk is linked to agency issues.
This study reveals the role of ESG reputational risk in the payout decision mechanism and
advancing our knowledge of financial decision making. Additionally, it exemplifies the use of payout
policy as an agency cost mitigating tool and risk management device (Bonaime et al. 2014, Easterbrook
1984; Jensen 1986). Lastly, our study emphasizes the significance of ESG reputational risk on firms’
corporate mechanisms and reveals the channels of its impact on fundamental financial decisions. From a
managerial perspective, our results document that investors consider ESG reputational risk as an important
factor in valuation
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31

Table 1. Descriptive Statistics
Panel A presents descriptive statistics of the variables used in the baseline regressions (1&2). Variable definitions are provided in table A1,
Appendix. Panel B shows the mean values for firms-years with high/low ESG reputational risk as proxied by CurrentRRI. A firm-year is
classified as High (Low) Current RRI if it falls above(below) the sample’s median. The last columns present the univariate test of difference in
means of the variables between high and low CurrentRRI firm-years. In panel C we present the correlation matrix of all variables used in the
baseline analysies. Variable definitions are provided in table A1, Appendix. * p<0.01 Variable definitions are provided in table A1, Appendix.
*** p<0.01, ** p<0.05, * p<0.1
Panel A N Mean Median Std. Dev. min max
TotalPayouts 13,113 0.043 0.020 0.057 -0.041 0.378
Rep% 13,113 0.489 0.526 0.421 0 1
PeakRRI 13,113 0.168 0.168 0.169 0 0.610
CurrentRRI 13,113 0.085 0.009 0.107 0 0.450
FreeCashFlows 13,113 -0.05 -0.030 0.124 -0.992 0.117
TobinsQ 13,113 1.967 1.568 1.322 0.561 11.643
Leverage 13,113 0.227 0.213 0.181 0 0.807
Age 13,113 27.353 23 16.769 3 58
CashFlowVol 13,113 0.046 0.033 0.043 0.004 0.285
Size 13,113 7.572 7.605 1.719 1.164 10.872
InstHoldings 13,113 0.727 0.801 0.246 0.011 1.00
Panel B Low CurrentRRI High CurrentRRI t-value
TotalPayouts 0.037 0.049 -12.22***
Rep% 0.464 0.514 -6.8778***
FreeCashFlows -0.064 -0.037 -12.09***
TobinsQ 1.995 1.938 2.51**
Leverage 0.207 0.248 -13.15***
Age 23.401 31.311 -27.80***
CashFlowVol 0.052 0.039 17.14***
Size 6.798 8.348 -57.86***
InstHoldings 0.712 0.742 -6.9669***
Panel C : Correlation Matrix
Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)
(1) TotalPayouts 1.000
(2) Rep% 0.270* 1.000
(3) CurrentRRI 0.160* 0.067* 1.000
(4) PeakRRI 0.147* 0.073* 0.872* 1.000
(5) FreeCashFlows 0.307* 0.170* 0.137* 0.120* 1.000
(6) TobinsQ 0.234* -0.023* -0.021* -0.029* -0.063* 1.000
(7) Leverage -0.060* -0.026* 0.108* 0.110* 0.055* -0.227* 1.000
(8) Age 0.189* 0.075* 0.313* 0.304* 0.171* -0.148* 0.058* 1.000
(9) CashFlowVol -0.121* -0.090* -0.170* -0.166* -0.454* 0.209* -0.196* -0.249* 1.000
(10) Size 0.196* 0.172* 0.544* 0.503* 0.384* -0.173* 0.320* 0.483* -0.439* 1.000
(11) InstHoldings 0.140* 0.288* 0.056* 0.072* 0.209* -0.012 0.098* 0.206* -0.206* 0.480* 1.000
32

Table 2. ESG Reputation Risk and Total Payouts
Results from estimating equation 1. Dependent variable is total payouts (common dividends plus share repurchases) scaled by the book value of
total assets. Columns 1-4 (5-8) proxy for ESG reputation risk with CurrentRRI (PeakRRI). Robust standard errors clustered at the firm level are
reported in parentheses. Variable definitions are provided in table A1, Appendix. p<0.01, ** p<0.05, * p<0.1.
(1) (2) (3) (4) (5) (6) (7) (8)
Left censored- Entropy Left censored- Entropy
BE Tobit HDFE balancing BE Tobit HDFE balancing
CurrentRRI 0.044*** 0.042*** 0.012* 0.021***
(0.008) (0.009) (0.007) (0.007)
PeakRRI 0.029*** 0.032*** 0.011*** 0.016***
(0.005) (0.005) (0.004) (0.005)
FreeCashFlows 0.144*** 0.243*** 0.095*** 0.097*** 0.144*** 0.244*** 0.095*** 0.098***
(0.009) (0.016) (0.008) (0.009) (0.009) (0.016) (0.008) (0.009)
TobinsQ 0.014*** 0.014*** 0.006*** 0.005*** 0.015*** 0.014*** 0.006*** 0.005***
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Leverage -0.005 -0.008 0.006 0.004 -0.005 -0.007 0.006 0.005
(0.005) (0.006) (0.007) (0.008) (0.005) (0.006) (0.007) (0.007)
Age 0.000*** 0.001*** 0.001*** 0.002*** 0.000*** 0.001*** 0.001*** 0.001***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
CashFlowVol -0.000 -0.028 -0.048** -0.031 0.001 -0.028 -0.049** -0.032
(0.020) (0.029) (0.023) (0.024) (0.020) (0.029) (0.023) (0.024)
Size 0.001 0.002* -0.017*** -0.017*** 0.001 0.002* -0.017*** -0.017***
(0.001) (0.001) (0.002) (0.002) (0.001) (0.001) (0.002) (0.002)
InstHoldings -0.008** -0.003 0.007 0.000 -0.009** -0.003 0.006 0.000
(0.004) (0.004) (0.006) (0.007) (0.004) (0.004) (0.006) (0.007)
Constant 0.021* -0.005 0.118*** 0.126*** 0.021* -0.005 0.119*** 0.128***
(0.011) (0.015) (0.019) (0.020) (0.011) (0.015) (0.019) (0.020)
Observations 13,113 13,113 13,113 13,113 13,113 13,113 13,113 13,113
R-squared 0.320 0.620 0.637 0.320 0.620 0.637
Year FE YES YES YES YES YES YES YES YES
Sector FE YES YES YES YES YES YES YES YES
Firm FE NO NO YES NO NO NO YES
33

Table 3. Institutional Holdings and Market Competition
Results from estimation equation 1 in subsamples of high/low monitoring. Dependent variable is total payouts (common dividends plus share repurchases) scaled by the book
value of total assets. Firm-years are stratified into subsamples according to whether they fall above or below the sample’s median value of institutional holdings and market
competition. Market competition is measured by the Herfindahl-Hirschman Index at the two-digit industry code using firm sales. Robust standard errors clustered at the firm
level are reported in parentheses. Variable definitions are provided in table A1, Appendix. p<0.01, ** p<0.05, * p<0.1.
Left censored Tobit HDFE Entropy Balancing Left censored Tobit HDFE Entropy Balancing
Institutional Holdings subsamples Market Competition subsamples
Low High Low High Low High Low High Low High Low High
CurrentRRI 0.043*** 0.048*** 0.030*** 0.048*** 0.006 0.036*** 0.033*** 0.043*** 0.033*** 0.040*** 0.041*** 0.045***
(0.009) (0.011) (0.009) (0.011) (0.009) (0.009) (0.011) (0.013) (0.009) (0.011) (0.007) (0.008)
FreeCashFlows 0.140*** 0.108*** 0.133*** 0.101*** 0.135*** 0.077*** 0.256*** 0.220*** 0.172*** 0.115*** 0.187*** 0.141***
(0.012) (0.009) (0.012) (0.009) (0.012) (0.009) (0.023) (0.020) (0.017) (0.011) (0.012) (0.008)
TobinsQ 0.013*** 0.014*** 0.011*** 0.013*** 0.004*** 0.004*** 0.020*** 0.011*** 0.020*** 0.011*** 0.021*** 0.011***
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.002) (0.001) (0.002) (0.001) (0.001) (0.001)
Leverage -0.011* -0.005 -0.007 -0.004 0.008 0.011 0.001 -0.015* 0.007 -0.008 0.005 -0.010**
(0.006) (0.006) (0.006) (0.006) (0.009) (0.008) (0.007) (0.008) (0.006) (0.007) (0.004) (0.005)
Age 0.000*** 0.000*** 0.000*** 0.000*** 0.002*** 0.001** 0.000*** 0.001*** 0.000*** 0.001*** 0.000*** 0.000***
(0.000) (0.000) (0.000) (0.000) (0.001) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
CashFlowVol -0.032 0.000 -0.038 -0.005 -0.099*** -0.008 0.097*** -0.112*** 0.052* -0.044* 0.050** -0.043*
(0.024) (0.024) (0.025) (0.025) (0.035) (0.022) (0.037) (0.038) (0.031) (0.025) (0.024) (0.023)
Size -0.001 0.001 -0.002* 0.001 -0.022*** -0.014*** 0.002* 0.002 0.001 0.001 0.000 0.001
(0.001) (0.001) (0.001) (0.001) (0.003) (0.002) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
InstHoldings 0.002 -0.006 -0.007 -0.006 -0.008*** -0.005
(0.006) (0.006) (0.005) (0.005) (0.003) (0.003)
Constant 0.085*** -0.001 0.029*** -0.001 0.150*** 0.118*** -0.017 0.005 -0.000 0.013 0.002 0.016***
(0.018) (0.009) (0.008) (0.008) (0.024) (0.020) (0.014) (0.012) (0.008) (0.008) (0.005) (0.006)
Year FE YES YES YES YES YES YES YES YES YES YES YES YES
Sector FE YES YES NO NO NO NO YES YES NO NO NO NO
Firm FE NO NO YES YES YES YES NO NO YES YES YES YES
Observations 6,460 6,653 6,460 6,652 6,460 6,652 6,550 6,563 6,550 6,563 6,550 6,563
R-squared 0.318 0.407 0.637 0.686 0.437 0.299 0.414 0.275
34

Table 4. ESG Reputational Risk and the Flexibility of the Payout Mix
Results from estimating equation 2. Dependent variable is share repurchases to total payouts (common dividends plus share repurchases). Robust standard errors
clustered at the firm level are reported in parentheses. Variable definitions are provided in table A1, Appendix. p<0.01, ** p<0.05, * p<0.1.
(1) (2) (3) (4) (5) (6) (7) (8)
Left censored- Entropy Left censored- Entropy
BE Tobit HDFE balancing BE Tobit HDFE balancing
CurrentRRI 0.142** 0.199** 0.142** 0.243***
(0.063) (0.087) (0.063) (0.071)
PeakRRI 0.112*** 0.175*** 0.112*** 0.157***
(0.040) (0.055) (0.040) (0.045)
FreeCashFlows 0.380*** 0.839*** 0.380*** 0.384*** 0.381*** 0.842*** 0.381*** 0.385***
(0.051) (0.097) (0.051) (0.058) (0.051) (0.097) (0.051) (0.058)
TobinsQ -0.012** -0.026*** -0.012** -0.019*** -0.012** -0.026*** -0.012** -0.019***
(0.005) (0.008) (0.005) (0.006) (0.005) (0.008) (0.005) (0.006)
Leverage -0.149*** -0.237*** -0.149*** -0.142*** -0.147*** -0.234*** -0.147*** -0.141***
(0.044) (0.062) (0.044) (0.051) (0.043) (0.062) (0.043) (0.051)
Age -0.002*** -0.001 -0.002*** -0.002*** -0.002*** -0.001 -0.002*** -0.002***
(0.000) (0.001) (0.000) (0.001) (0.000) (0.001) (0.000) (0.001)
CashFlowVol -0.224 -0.408 -0.224 -0.142 -0.224 -0.409 -0.224 -0.135
(0.172) (0.278) (0.172) (0.195) (0.172) (0.278) (0.172) (0.195)
Size 0.007 0.017* 0.007 -0.001 0.006 0.015* 0.006 -0.000
(0.007) (0.009) (0.007) (0.007) (0.006) (0.009) (0.006) (0.007)
InstHoldings 0.286*** 0.400*** 0.286*** 0.348*** 0.285*** 0.400*** 0.285*** 0.345***
(0.033) (0.050) (0.033) (0.037) (0.033) (0.050) (0.033) (0.037)
Constant 0.375*** 0.157 0.351*** 0.363*** 0.376*** 0.161* 0.349*** 0.354***
(0.066) (0.095) (0.051) (0.058) (0.065) (0.093) (0.049) (0.057)
Sector FE YES YES YES YES YES YES YES YES
Observations 13,113 13,113 13,113 13,113 13,113 13,113 13,113 13,113
R-squared 0.168 0.168 0.188 0.169 0.169 0.188
35

Table 5. ESG Reputational Risk and the Flexibility of the Payout Mix Under Financial Constraints
Results from estimation equation 2 in subsamples of high/low financial constraints. Dependent variable is share repurchases to total payouts (common dividends plus share
repurchases). Firm-years are stratified into subsamples according to whether they fall above or below the sample’s median value of the Whited-Wu (2006) (Columns 1-3) and
Kaplan and Zingales (1997) (Columns 4-6) indices. Robust standard errors clustered at the firm level are reported in parentheses. Variable definitions are provided in table A1,
Appendix. p<0.01, ** p<0.05, * p<0.1.
(1) (2) (3) (4) (5) (6)
Left censored Tobit HDFE Entropy Balancing Left censored Tobit HDFE Entropy Balancing
Financing Constraints (WW index) Financing Constraints (KZ index)
Low High Low High Low High Low High Low High Low High
CurrentRRI 0.026 0.181* 0.026 0.181* 0.196*** 0.219*** 0.107 0.196** 0.107 0.196** 0.205*** 0.261***
(0.077) (0.095) (0.078) (0.096) (0.058) (0.079) (0.080) (0.092) (0.081) (0.093) (0.058) (0.074)
FreeCashFlows 0.750*** 0.418*** 0.750*** 0.418*** 0.723*** 0.399*** 0.398*** 0.522*** 0.398*** 0.522*** 0.378*** 0.512***
(0.137) (0.060) (0.137) (0.060) (0.111) (0.048) (0.066) (0.073) (0.066) (0.074) (0.049) (0.063)
TobinsQ 0.002 -0.017** 0.002 -0.017** -0.011** -0.022*** -0.005 -0.002 -0.005 -0.002 -0.013*** -0.009
(0.007) (0.007) (0.008) (0.007) (0.005) (0.005) (0.007) (0.009) (0.007) (0.009) (0.004) (0.006)
Leverage -0.164*** -0.221*** -0.164*** -0.221*** -0.190*** -0.191*** -0.233*** -0.206*** -0.233*** -0.206*** -0.212*** -0.193***
(0.059) (0.057) (0.059) (0.057) (0.045) (0.041) (0.060) (0.060) (0.060) (0.060) (0.037) (0.045)
Age -0.001** -0.002** -0.001** -0.002** -0.001** -0.002*** -0.002*** -0.002** -0.002*** -0.002** -0.001*** -0.002***
(0.001) (0.001) (0.001) (0.001) (0.000) (0.000) (0.001) (0.001) (0.001) (0.001) (0.000) (0.000)
CashFlowVol -0.248 -0.237 -0.248 -0.237 -0.313 -0.138 0.053 -0.290 0.053 -0.290 0.143 -0.367
(0.268) (0.202) (0.270) (0.203) (0.218) (0.174) (0.216) (0.252) (0.217) (0.253) (0.169) (0.239)
Size 0.040*** 0.008 0.040*** 0.008 0.019*** 0.007 0.029*** -0.013 0.029*** -0.013 0.021*** -0.009
(0.009) (0.009) (0.009) (0.009) (0.006) (0.007) (0.009) (0.009) (0.009) (0.009) (0.006) (0.007)
InstHoldings 0.425*** 0.240*** 0.425*** 0.240*** 0.433*** 0.302*** 0.265*** 0.278*** 0.265*** 0.278*** 0.364*** 0.286***
(0.043) (0.044) (0.043) (0.044) (0.031) (0.030) (0.044) (0.045) (0.044) (0.045) (0.025) (0.035)
Constant 0.050 0.345*** -0.078 0.423*** 0.103* 0.383*** 0.265 0.457*** 0.174** 0.518*** 0.156*** 0.501***
(0.091) (0.101) (0.078) (0.061) (0.061) (0.043) (0.181) (0.117) (0.068) (0.069) (0.041) (0.050)
Observations 6,460 6,653 6,460 6,652 6,460 6,652 6,550 6,563 6,550 6,563 6,550 6,563
Year FE YES YES YES YES YES YES YES YES YES YES YES YES
Observations YES YES YES YES YES YES YES YES YES YES YES YES
R-squared YES YES 0.228 0.180 0.247 0.189 0.198 0.191 0.244 0.187
36

Table 6. This table documents two-stage least-squares regression estimates of the relation between ESG reputational risk and
total payouts (columns 2 and 5) and ESG reputational risk and payout flexibility1(columns 3 and 6). In columns (1) to (3) we
instrument ESG reputational risk using the industry averages (3-digit SIC) while in columns (4) to (6) we use Lewbel’s (2012)
methodology to generate heteroscedasticity-based instruments. We report standard errors in parenthesis. Variable definitions
are provided in table A1, Appendix. p<0.01, ** p<0.05, * p<0.1.
(1) (2) (3) (4) (5) (6)
Dependent Variable TotalPayouts Rep% TotalPayouts Rep%
VARIABLES 1st stage 2nd stage 2nd stage 1st stage 2nd stage 2nd stage
Industry average- based instruments Lewbel heteroscedasticity-based instruments
CurrentRRI 0.042*** 0.151*** 0.041*** 0.126***
(0.005) (0.040) (0.005) (0.039)
FreeCashFlows -0.035*** 0.142*** 0.375*** 0.142*** 0.375***
(0.007) (0.006) (0.033) (0.006) (0.033)
TobinsQ 0.002*** 0.015*** -0.012*** 0.015*** -0.012***
(0.001) (0.001) (0.003) (0.001) (0.003)
Leverage -0.057*** -0.007** -0.156*** -0.007** -0.156***
(0.005) (0.003) (0.023) (0.003) (0.023)
Age 0.001*** 0.000*** -0.002*** 0.000*** -0.002***
(0.000) (0.000) (0.000) (0.000) (0.000)
CashFlowVol 0.127*** 0.006 -0.205** 0.006 -0.205**
(0.020) (0.014) (0.105) (0.014) (0.105)
Size 0.040*** 0.002*** 0.012*** 0.002*** 0.012***
(0.001) (0.000) (0.003) (0.000) (0.003)
InstHoldings -0.059*** -0.010*** 0.279*** -0.010*** 0.279***
(0.003) (0.002) (0.017) (0.002) (0.017)
Industry Average CurrentRRI 0.903***
(0.039)
z_InstHoldings -0.059***
(0.003)
z_ TobinsQ 0.003***
(0.001)
z_ CashFlowVol 0.135***
(0.021)
z_ Age 0.001***
(0.000)
z_ Size 0.041***
(0.001)
z_ FreeCashFlows -0.035***
(0.007)
z_ Leverage -0.056***
(0.005)
Constant -0.264*** 0.002 0.325*** 0.079*** 0.002 0.325***
(0.006) (0.003) (0.023) (0.001) (0.003) (0.023)
Observations 13,113 13,113 13,113 13,113 13,113 13,113
R-squared 0.488 0.319 0.169 0.467 0.319 0.168
Year FE YES YES YES YES YES YES
Sector FE YES YES YES YES YES YES
Cragg-Donald Wald F statistic: 0.000 0.000
Week identification test: 29.51 45.78
Hansen J statistic (p-value): - 0.153
37

Table 7. Sample Selection Tests
This table presents the Heckman two-stage procedure. The dependent variable is total payouts to total assets in columns 1-4 and share repurchases to
total payouts in columns 5-8. The key independent variable is the predicted value of the probability of having an ESG reputation risk above the sector’s
median. Variable definitions are provided in Table A1, Appendix. *** p < 0.01, ** p < 0.05, * p < 0.1. Standard errors are reported in the parenthesis.
All specifications include Industry and year fixed effects.
(1) (2) (3) (4) (5) (6) (7) (8)
Dependent variable: TotalPayouts Dependent variable: Rep%
Heckman Heckman Heckman Heckman Heckman
main selection Heckman main selection Heckman main selection Heckman main selection
VARIABLES equation equation equation equation equation equation equation equation
CurrentRRI 0.037*** 0.119**
(0.007) (0.047)
PeakRRI 0.028*** 0.095***
(0.006) (0.029)
FreeCashFlows 0.199*** -0.152 0.199*** -0.152 0.444*** -0.366*** 0.446*** -0.366***
(0.007) (0.126) (0.007) (0.126) (0.041) (0.122) (0.040) (0.122)

TobinsQ 0.017*** 0.039*** 0.017*** 0.039*** -0.004 0.025*** -0.004 0.025***
(0.001) (0.009) (0.001) (0.009) (0.003) (0.009) (0.003) (0.009)
Leverage -0.000 -0.329*** -0.000 -0.329*** -0.136*** 0.060 -0.135*** 0.060
(0.004) (0.072) (0.004) (0.072) (0.025) (0.071) (0.025) (0.071)
Age 0.000*** 0.006*** 0.000*** 0.006*** -0.001*** 0.001 -0.002*** 0.001
(0.000) (0.001) (0.000) (0.001) (0.000) (0.001) (0.000) (0.001)
CashFlowVol -0.003 0.726** -0.002 0.726** -0.530*** 1.823*** -0.523*** 1.823***
(0.019) (0.340) (0.019) (0.340) (0.133) (0.337) (0.132) (0.337)
Size 0.003** 0.404*** 0.003*** 0.404*** -0.002 0.089*** -0.003 0.089***
(0.001) (0.010) (0.001) (0.010) (0.005) (0.009) (0.005) (0.009)
InstHoldings -0.004 -0.359*** -0.005 -0.359*** 0.383*** 0.085* 0.383*** 0.085*
(0.003) (0.054) (0.003) (0.054) (0.019) (0.051) (0.019) (0.051)
ManagerialAbility -1.467*** -1.467*** -0.091 -0.091
(0.175) (0.175) (0.172) (0.172)
StatePoliticalOrientation 0.129*** 0.129*** 0.110*** 0.110***
(0.017) (0.017) (0.016) (0.016)
StateReligion 0.054 0.054 0.448*** 0.448***
(0.081) (0.081) (0.080) (0.080)
StateSectorMeanRRI 0.024*** 0.024*** 0.023*** 0.023***

(0.002) (0.002) (0.002) (0.002)
lambda 0.011** 0.011** -0.059 -0.050

(0.005) (0.005) (0.079) (0.079)
Constant -0.021* -3.039*** -0.027** -3.039*** 0.363*** -3.304*** 0.357*** -3.304***
(0.012) (0.530) (0.012) (0.530) (0.058) (0.518) (0.077) (0.518)
Firm FE YES YES YES YES YES YES YES YES
Observations 13,113 13,113 13,113 13,113 13,113 13,113 13,113 13,113
38

Table 8. ESG Reputational Risk and Firm Value
This table estimates equation 11 for the full sample and for subsamples of high and low ESG reputational risk. The dependent variable MarketValue t is
the market value of equity plus the book value of debt scaled by the book value of total assets. Xt is the level of variable X in year t divided by the book
value of assets in year t. ΔXt is the change in the level of X from year t−1 to year t divided by the book value of assets in year t, ((Xt − Xt-1)/At), where A
is the book value of assets. ΔXt+1 is the change in the level of X from year t+1 to year t divided by the book value of assets in year t, ((Xt+1 − Xt)/At).
Earnings is earnings defined as earnings before extraordinary items plus interest plus deferred tax credits plus investment tax credits. NetAssets is net
assets, which is defined as total assets minus cash. R&D is research and development expense. When R&D is missing, it is set to zero. I is interest
expense. Payouts is common dividends plus share repurchases. Cash is cash and short-term investments. All estimations include firm and year fixed
effects. Robust standard errors are reported in parentheses. *** p<0.01, ** p<0.05, * p<0.1.
(1) (2) (3) (4) (5) (6)
Full sample Low CurrentRRI High CurrentRRI Full sample PeakRRI High PeakRRI
CurrentRRI -0.319***
(0.097)
PeakRRI -0.198***
(0.060)
Payoutst 3.747*** 2.096*** 4.928*** 3.744*** 2.312*** 4.930***
(0.344) (0.529) (0.354) (0.343) (0.533) (0.355)
ΔPayoutst -0.502** -0.276 -1.128*** -0.498** -0.348 -1.115***
(0.212) (0.315) (0.230) (0.212) (0.323) (0.226)
ΔPayoutst+1 2.079*** 1.304*** 1.939*** 2.078*** 1.466*** 1.848***
(0.247) (0.377) (0.247) (0.247) (0.378) (0.248)
Earningst 1.678*** 1.535*** 1.623*** 1.679*** 1.583*** 1.522***
(0.217) (0.337) (0.261) (0.217) (0.350) (0.257)
ΔEarningst -0.178 -0.243 0.119 -0.179 -0.142 0.145
(0.123) (0.185) (0.157) (0.123) (0.193) (0.164)
ΔEarningst+1 1.187*** 1.046*** 1.147*** 1.186*** 1.096*** 1.164***
(0.132) (0.179) (0.184) (0.132) (0.185) (0.181)
ΔNetAssetst 0.494*** 0.495*** 0.613*** 0.490*** 0.450*** 0.630***
(0.057) (0.084) (0.066) (0.057) (0.086) (0.065)
ΔNetAssetst+1 0.716*** 0.825*** 0.733*** 0.715*** 0.785*** 0.746***
(0.052) (0.065) (0.063) (0.052) (0.066) (0.063)
R&Dt 2.810*** 1.073 7.422*** 2.809*** 0.726 7.425***
(0.808) (1.067) (0.980) (0.809) (0.984) (0.983)
ΔR&Dt 3.286*** 0.841 5.208*** 3.274*** 1.375 5.285***
(1.119) (1.318) (1.328) (1.120) (1.327) (1.314)
ΔR&Dt+1 5.944*** 3.401** 11.764*** 5.942*** 3.606*** 11.771***
(1.092) (1.373) (1.180) (1.092) (1.351) (1.167)
Interestt 2.552* 3.237 -2.652* 2.555* 3.696* -2.878*
(1.342) (2.071) (1.537) (1.341) (2.117) (1.478)
ΔInterestt -6.078*** -6.130*** -2.559 -6.056*** -5.641*** -2.043
(1.451) (1.945) (1.832) (1.451) (1.950) (1.776)
ΔInterestt+1 -4.853*** -6.809*** -8.876*** -4.796*** -5.474*** -9.817***
(1.661) (1.977) (1.984) (1.661) (1.996) (1.981)
ΔMarketValuet+1 -0.273*** -0.338*** -0.227*** -0.273*** -0.318*** -0.229***
(0.022) (0.029) (0.023) (0.022) (0.028) (0.023)
Casht 2.153*** 2.119*** 2.182*** 2.149*** 2.173*** 2.129***
(0.168) (0.240) (0.161) (0.168) (0.248) (0.163)
ΔCasht 1.764*** 2.075*** 2.085*** 1.766*** 2.084*** 2.133***
(0.134) (0.183) (0.165) (0.134) (0.184) (0.165)
Constant 1.142*** 1.242*** 1.081*** 1.148*** 1.236*** 1.096***
(0.049) (0.076) (0.048) (0.049) (0.077) (0.046)
Observations 11,246 5,623 5,623 11,246 5,623 5,623
R-squared 0.803 0.829 0.736 0.803 0.838 0.735
39

Table 9. ESG Reputational Risk and Excess Returns.
𝐵
This table presents estimations from estimating equation 12. The dependent variable is 𝑟𝑖,𝑡 – 𝑅𝑖,𝑡 . DummyCurrentRRI and DummyPeakRRI are indicator
variables that take the value of one if CurrentRRI (PeakRRI) is above the sample’s median and zero otherwise. All remaining variables except stock returns
are scaled by the lagged market value of equity MVt-1. Casht is cash plus short-term investments. Earningst is earning before extraordinary items plus
interest, deferred tax credits and investment tax credits, NAt is total assets minus cash, It is interest expense, TP is the total payout calculated as the sum of
cash dividends plus share repurchases, Leveraget is market leverage, NetFinancingt is net financing calculated as total equity issuance plus debt issuance
minus repurchases minus debt redemption, R&Dt is research and development expenditures set to zero if missing. Τhe generic notation ΔX signifies the 1-
year change, Xt -Xt-1. The subscript t-1 means that the variable is measured at the end of fiscal year t-1. All estimations include firm and year fixed effects.
Robust standard errors are reported in parentheses. *** p<0.01, ** p<0.05, * p<0.1.
(1) (2) (3) (4)
DummyCurrentRRI -0.012 -0.031***
(0.008) (0.010)
DummyPeakRRI 0.010 -0.009
(0.006) (0.007)
ΔPayoutst -0.038 -0.126 -0.084 -0.160
(0.067) (0.091) (0.076) (0.101)
DummyCurrentRRI*ΔPayoutst 0.256* 0.431**
(0.154) (0.177)
DummyPeakRRI*ΔPayoutst 0.268** 0.346**
(0.120) (0.142)
ΔCasht 0.959*** 0.902*** 0.956*** 0.899***
(0.070) (0.091) (0.070) (0.091)
ΔΕarningst 0.379*** 0.440*** 0.379*** 0.441***
(0.026) (0.034) (0.025) (0.034)
ΔNetAssetst 0.171*** 0.175*** 0.171*** 0.175***
(0.015) (0.018) (0.015) (0.018)
ΔR&Dt 0.995*** 0.953** 0.996*** 0.948**
(0.348) (0.474) (0.348) (0.474)
ΔΙnterestt -0.581* -0.832* -0.575* -0.821*
(0.347) (0.480) (0.348) (0.480)
Casht-1 0.237*** 0.295*** 0.238*** 0.295***
(0.024) (0.027) (0.024) (0.027)
Leveraget -0.341*** -0.369*** -0.341*** -0.369***
(0.017) (0.021) (0.017) (0.021)
NetFinancingt -0.166*** -0.187*** -0.163*** -0.187***
(0.030) (0.038) (0.030) (0.038)
Leveraget*ΔCasht -0.849*** -0.817*** -0.849*** -0.819***
(0.140) (0.182) (0.140) (0.182)
Casht-1*ΔCash -0.222** -0.236* -0.218** -0.233*
(0.093) (0.122) (0.093) (0.122)
Constant 0.018*** 0.036*** 0.012** 0.034***
(0.005) (0.006) (0.006) (0.007)
Observations 12,448 12,448 12,448 12,448

R-squared 0.184 0.199 0.184 0.199
40

Appendix A:
Table A1. Variable Definitions

Variable Definition Source
Purchases of common and preferred stock plus common dividends
TotalPayouts to book value of total assets. Compustat
Purchases of common and preferred stock6 scaled by the sum of
Rep% purchases of common and preferred stock and cash dividends Compustat
A company’s current level of ESG reputational exposure to media
and stakeholder attention, ranging from zero (lowest) to 100
CurrentRRI (highest) and converted to range from 0 to 1. RepRisk Global Business Intelligence database
A company’s accumulated ESG reputational exposure for the last
two years to media and stakeholder attention, ranging from zero
PeakRRI (lowest) to 100 (highest) and converted to range from 0 to 1. RepRisk Global Business Intelligence database
Free Cash Flows as calculated by Richardson’s (2006) accounting-
FreeCashFlows based framework. Author’s calculations
Market-to-book ratio, calculated as the market value of
assets((PRCC_F*CSHO) + AT – CEQ)) divided by the book value
TobinsQ of assets (AT) Compustat
Leverage Total debt scaled by the book value of total assets Compustat
Orbis database, J.R. Ritter
Age Number of years elapsing from a firm's foundation day (https://site.warrington.ufl.edu/ritter/ipo-data/)
standard deviation of operating cash flows- rolling three year
CashFlowVol window Compustat
InstHoldings Institutional Holdings & of shares held by institutions Thomson/Refinitiv
measure of a firm's efficiency within its industry, based on data Constructed by the authors following the
envelopment analysis, with values ranging from zero (inefficient methodology of Demerjian et al. (2012) and
Firm Efficiency firm) to one (fully efficient firm) using Compustat data.
Whited-Wu (2006) index =− 0.091𝐶𝐹 − 0.062𝐷𝐷 + 0.021𝐿𝐸𝑉 −
0.44𝐿𝑁𝑇𝐴 + 0.102ISG − 0.035SG, where,
CF: is operating cash flows scaled by the book value of total assets
DD: is a dummy variable, which takes the value of 1 if a firm pays
dividends and zero otherwise.
LEV: is the Leverage variable
LNTA: is the FirmSize variable
ISG: is the firm’s industry sales growth. Industry is defined as the 3-
digit industry sic-code
Whited-Wu (2006) SG: is sales growth between t and t-1 Compustat
Kaplan and Zingales (1997) index: 0.238𝑄 − 1.002𝐶𝐹 +
3.139𝐿𝐸𝑉𝑅 − 39.368𝐷𝐼𝑉 − 1.315𝐶𝐴𝑆𝐻, were,
Q: is the TobinsQ variable
CF: is operating cash flows scaled by the book value of total assets
LEVR: is the Leverage variable
DIV: is cash dividends scaled by the book value of total assets
CASH: is the firm’s cash and cash equivalents dividend by the book
Kaplan and Zingales (1997) value of total assets Compustat
Size Natural logarithm of the book value of total assets. Compustat
Data on religiosity are obtained from the
Religion ranking of the state in which the issuer's headquarters are Association of Religion Data Archive, available
located. The ranking is based on the ratio of the number of religious at:
State Religion adherents in the issuer's state to the total population in that state in http://www.thearda.com/Archive/Files/Descripti
2010. ons/RCMSST10.asp
A dummy variable equal to one if a firm's headquarters are located
in a Democratic state and zero, otherwise. A state is democratic if The list of democratic states is available at:
the Democratic Party won the last presidential election prior to the https://en.wikipedia.org/wiki/Red_states_and_bl
State Political Orientation IPO announcement date in that state. ue_states.
Average ESG of the sector (second digit-SIC code) that a firm
StateSectorAverageRRI belongs RepRisk Global Business Intelligence database
MarketValue is the market value of the firm calculated at fiscal year
end as the sum of the market value of equity, the book value of short-
MarketValue term debt, and the book value of long-term debt Compustat
Earnings before extraordinary items plus interest plus deferred tax
Earnings credits plus investment tax credits to total assets Compustat
NetAssets Total assets minus cash and scaled by total assets Compustat
6 “Purchases of common and preferred stock” is considered as the most accurate measurement of actual share repurchases (Banyi et al., 2008).
41

Interest Interest expense scaled by total assets Compustat
Payouts to book value of total assets. Compustat
R&D Research and development expenditures scaled by total assets Compustat
Cash Cash and short-term investment to total assets Compustat
DummyCurrentRRI and DummyPeakRRI are indicator variables that
take the value of one if CurrentRRI (PeakRRI) is above the sample’s
DummyCurrentRRI,DummyPeak median and zero otherwise.
Earnings before extraordinary items plus interest plus deferred tax
Earnings΄ credits plus investment tax credits to lagged market of equity Compustat
NetAssets΄ Total assets minus cash to lagged market value of equity Compustat
total equity issuance plus debt issuance minus repurchases minus
NetFinancing debt redemption to lagged market value of equity Compustat
Interest΄ Interest expense to lagged market value of equity Compustat
Payouts΄ to lagged market value of equity Compustat
Research and development expenditures to lagged market value of
R&D΄ equity Compustat
Cash΄ Cash and short-term investment to the lagged market value of equity Compustat
Leverage΄ Market leverage Compustat
42

Table A2. Entropy Balancing
This table documents the results from the entropy balancing approach. Panel A present the mean, variance and skewness between the treated and
control groups before and after weighting. Panel B reports the entropy balancing regression estimates. Standard errors in panel B are reported in
parentheses. Variable definitions are reported in table A1, appendix. *** p<0.01, ** p<0.05, * p<0.1
Panel A: Entropy Balancing Weighting
Before: Without weighting Treat Control
mean variance skewness mean variance skewness
FreeCashFlows -0.044 0.013 -3.566 -0.064 0.021 -3.260
TobinsQ 2.034 1.898 2.966 2.000 1.992 2.979
Leverage 0.225 0.030 0.632 0.206 0.036 0.785
Age 27.620 301.300 0.499 23.340 211.400 0.899
CashFlowVol 0.046 0.002 2.639 0.052 0.002 2.583
Size 7.640 3.364 -0.234 6.785 2.073 -0.323
InstHoldings 0.676 0.064 -0.861 0.712 0.071 -0.991
After: Weighting variables Treat Control
mean variance skewness mean variance skewness
FreeCashFlows -0.044 0.013 -3.566 -0.044 0.013 -3.699
TobinsQ 2.034 1.898 2.966 2.034 2.316 3.210
Leverage 0.225 0.030 0.632 0.225 0.033 0.705
Age 27.620 301.300 0.499 27.620 259.000 0.506
CashFlowVol 0.046 0.002 2.639 0.046 0.002 2.897
Size 7.640 3.364 -0.234 7.640 2.100 -0.377
InstHoldings 0.676 0.064 -0.861 0.676 0.076 -0.875
43

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ESG Reputational Risk, Corporate Payouts and Firm Value

Ioannis Chasiotis, Dimitrios Gounopoulos, Dimitrios Konstantios, Victoria Patsika1

JEL classification: E22; G30; G32; G10; G12; G14; G30

Electronic copy available at: https://ssrn.com/abstract=4180523

lead to adverse consequences across several firm dimensions.

and firm value.

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payouts through its impact on financial risk.

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which warrants an empirical investigation.

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reputational risk firms comparatively more.

to be wasted in managerial self-serving endeavors.

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relationships between ESG and firms’ cash holdings.

the results. Section 5 summarizes the findings and concludes.

2. Literature review and hypotheses development

2.1 ESG reputational risk

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2.2 Corporate payout policy

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compares and contrasts this payout mechanism to traditional cash dividends.

such as capital investment and risk management.

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Share repurchase announcements do not represent a legal commitment. Moreover, repurchase

2.3 Hypotheses development

appropriate composition and intensity of the payout mix.

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presence of incentive alignment monitoring mechanisms.

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level of financial hedging and vice versa.

amplified in the presence of financial constraints.

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low ESG reputational risk firms. Specifically:

3. Data and empirical methodology

3.1 Sample construction and sources

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reduce the protentional impact of outliers.

3.2 ESG reputational risk measurement

reputational risk), considering exposure to ESG aspects.

𝑃𝑎𝑦𝑜𝑢𝑡𝑠𝑖,𝑡 = 𝑎0 + 𝑎1 𝐸𝑆𝐺𝑅𝑒𝑝𝑅𝑖𝑠𝑘𝑖,𝑡 + 𝑎2 𝑍𝑖,𝑡 + 𝑓𝑖𝑟𝑚𝑖 + 𝑦𝑒𝑎𝑟𝑡 + 𝑢 𝜄,𝑡 (Eq.1)

3 The information is available on the documentation and practices at: https://www.reprisk.com.

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should be larger in the high monitoring and financial constraints subsamples.

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firms are more likely to be exposed to similar ESG risks.

Moreover, we use heteroskedasticity-based instruments as suggested by Lewbel (2012). This

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external instruments to improve the efficiency of the IV estimator.

𝐸𝑆𝐺𝑖,𝑡 = 𝑎0 + 𝑎1 𝐼𝑛𝑠𝑡𝑟𝑢𝑚𝑒𝑛𝑡𝑖,𝑡 + 𝑎2 𝑍𝑖,𝑡 + 𝑓𝑖𝑟𝑚𝑖 + 𝑦𝑒𝑎𝑟𝑡 + 𝑢 𝜄,𝑡 (Eq.3)

Total𝑃𝑎𝑦𝑜𝑢𝑡𝑠𝑖,𝑡 = 𝑎0 + 𝑎1 𝑃𝑟𝑒𝑑𝑖𝑐𝑡𝑒𝑑(𝐸𝑆𝐺)𝑖,𝑡 + 𝑎2 𝑍𝑖,𝑡 + 𝑓𝑖𝑟𝑚𝑖 + 𝑦𝑒𝑎𝑟𝑡 + 𝑢 𝜄,𝑡 (Eq.4)

𝑅𝑒𝑝%𝑖,𝑡 = 𝑎0 + 𝑎1 𝑃𝑟𝑒𝑑𝑖𝑐𝑡𝑒𝑑(𝐸𝑆𝐺)𝑖,𝑡 + 𝑎2 𝑍𝑖,𝑡 + 𝑓𝑖𝑟𝑚𝑖 + 𝑦𝑒𝑎𝑟𝑡 + 𝑢′ 𝜄,𝑡 (Eq.5)

As an alternative approach to address the endogeneity concern, we utilize entropy-balancing

3.3.3 Heckman selection model

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reputational risk and low ESG reputational risk, respectively.

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the cumulative distribution function.

that ESG reputational risk is positive. The IMR is calculated as follows:

ΜarketValuei,t = α + β1 Earningsi,t + β2ΔEarningsi,t + β3Δearningsi,t+1 + β4ΔnetAssetsi,t + β5ΔnetAssetsi,t+1 + β6R&Di,t

+β7ΔR&Di,t +β8ΔR&Di,t+1 +β9Interesti,t +β10Δinteresti,t +β11Δinteresti,t+1 +β12Payoutsi,t + β13Δpayoutsi,t +

β14Δpayoutsi,t+1 + β15ΔμarketValuei,t+1 + β16Cashi,t + β17Δcashi,t+1 +𝑦𝑒𝑎𝑟 + 𝑓𝑖𝑟𝑚 εi,t (Eq.11)

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StateSectorMeanRRI 0.024* 0.024* 0.023* 0.023*

lambda 0.011 0.011 -0.059 -0.050