Do firms adjust their payout policy to public perception of their social irresponsibility?

•Firms respond to increased public perception of their corporate social irresponsibility (CSI) by paying higher dividends.•This result holds for various payout measures and is robust to endogeneity concerns.•Firms pay higher dividends to signal favorable private information and are rewarded with higher market valuation.•Signaling firms subsequently experience a faster decrease in the perception of their CSI.•They also benefit from a lower cost of debt and higher sales growth.•The incentive to signal is stronger for high-growth firms that require more external financing. Perception of social irresponsibility from negative media coverage may affect a firm’s payout in two opposite ways. Firms may lower dividends in anticipation of greater financial constraints or pay higher dividends to signal that potential damage to their reputation and future cash flows is expected to be limited. Using data from RepRisk for a sample of US firms, we find compelling evidence supporting the second outcome, i.e., firms perceived as socially irresponsible pay higher dividends. This result remains valid for different payout measures and after controlling for endogeneity using instrumental variables, entropy balancing, and a difference-in-differences approach. Furthermore, the relationship is stronger for high-growth firms, consistent with their greater needs for external finance. The signaling motive is further supported by the stronger valuation effect of dividends for firms perceived as socially irresponsible, as well as the subsequent decrease in the perception of their irresponsibility and higher sales growth. Overall, the results suggest that firms use dividend policy to mitigate the potential damage due to the perception of their social irresponsibility.