Is Social Trust a Governance Mechanism? Evidence From Dividend Payouts of Chinese Firms

While management studies show that micro-level trust within and between firms affects firm performance and innovation, it is unclear how macro-level trust, namely social trust, affects corporate decisions. Addressing this is important because micro-level trust is shaped by macro-level social norms. A growing literature finds that corporations are influenced by local social norms. Drawing from this insight and using various measures of social trust, we examine the impact of social trust on dividend payouts. We find that levels of social trust, both in terms of directly measured trust and trust inferred from concomitant levels of civic social capital, negatively impact dividend payouts of local firms across Chinese provinces. We argue that community social trust supplies governance and plays a substitute role for dividend payouts, with a higher level of social trust engendering a lower demand for dividend payouts. This negative effect is more pronounced for younger firms, companies with high growth potential and firms in regions of less-developed institutional environments. We further show that agency cost plays an important mediating role, since high social trust reduces agency cost, jointly affecting dividends. Firms in high-trust regions make meaningful use of their greater retained earnings for research and development and innovations.

Automated summary

This study examines the impact of social trust on dividend payouts of local firms in China. The findings suggest that social trust has a negative effect on dividend payouts, especially for younger firms, companies with high growth potential, and firms in regions with less-developed institutional environments.