Is Social Trust a Governance Mechanism? Evidence From Dividend Payouts of Chinese Firms
| Published date | 01 October 2023 |
| Author | John W. Goodell,Mingsheng Li,Desheng Liu,Ying Wang |
| Date | 01 October 2023 |
| DOI | http://doi.org/10.1111/1467-8551.12671 |
British Journal of Management, Vol. 34, 1948–1973 (2023)
DOI: 10.1111/1467-8551.12671
Is Social Trust a Governance Mechanism?
Evidence From Dividend Payouts ofChinese
Firms
John W. Goodell,1Mingsheng Li,2Desheng Liu3and Ying Wang4
1University of Akron, Akron, OH, 44325, USA, 2Bowling Green State University, Bowling Green,OH, 43403,
USA, 3Qilu University of Technology (Shandong Academy of Sciences), Shangdong, Jinan, 250353, China, and
4Shandong University of Finance and Economics, Shangdong, Jinan, 250014, China
Corresponding author email: johngoo@uakron.edu
While management studies show that micro-level trust within and between rms affects
rm performance and innovation, it is unclear how macro-leveltrust, namely social trust,
affects corporate decisions. Addressing this is important because micro-level trust is
shaped by macro-level social norms. A growing literature nds that corporations are in-
uenced 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 nd that levels
of social trust, both in terms ofdirectly measured trust and trust inferred from concomi-
tant levels of civic social capital, negatively impact dividend payoutsoflocal rms 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
rms, companies with high growth potential and rms in regions of less-developed institu-
tional environments. Wefurther 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 develop-
ment and innovations.
The authors thank Douglas Cumming (Editor-in-Chief),
three anonymous reviewers, Natalya Bikmetova, Stephen
Treanor, the participants of 2022 EFMA, 2021 FMA
(Denver), the participants of the Financial Workshop at
BGSU and the Financial Seminar Series at Shandong
University of Finance and Economics and Qilu Univer-
sity of Technology for their comments and suggestions.
We are grateful for Andrew Walder’s generosity in allow-
ing us access to China’sCultural Revolution data. Wealso
thank Liang Bai and Lingwei Wufor sharing with us their
insights on using China’s Cultural Revolution data. Liu
acknowledges support from the National Social Science
Foundation of China [Grant number 20BJY111]
The authors contributed to the workequally and are listed
alphabetically based on surname.
Trust is a necessary social lubricant thatallows indi-
viduals to come together and contract.
Arrow (1974)
Risk and interdependence are necessary conditions
for trust.
Rousseau et al. (1998)
Introduction and motivation
The literature shows that trust both within and
between organizations affects rm performance
(Arranz and de Arroyabe, 2012; Hughes et al.,
2018), reduces the risk of betrayals, costs of ne-
gotiation and transaction (Buckley et al., 2009;
© 2022 British Academy of Management.
Is Social Trust a Governance Mechanism?1949
Holtgrave et al., 2020; Thorgren and Wincent,
2011) and mitigates the negative effects of geo-
graphic and cultural distance (Hain, Johan and
Wang, 2016). We extend this literature by in-
vestigating how macro-level social trust impacts
corporate behaviours. Such an endeavouris mean-
ingful, as Rousseau et al. (1998) and Hatzakis
(2009) highlight that trust is a multi-level issue,
requiring theory and research methods to reect
its multi-faceted attributions. Additionally, micro-
level trust relations are inuenced by macro pro-
cesses and social trust (Rousseau et al., 1998;
Sitkin, 1995; Sitkin and Stickel, 1996). Empiri-
cally, many studies show that social environment
and trust affect corporate behaviours (Cialdini
and Goldstein, 2004; Dong et al., 2018; Hilary
and Hui, 2009; Sunstein, 1996; Yonker, 2017),
such as tax avoidance (Hasan et al., 2017), corpo-
rate social responsibility activities (Hoi, Wu and
Zhang, 2018), CEO compensation (Hoi, Wu and
Zhang, 2019), corporate innovation (Hasan et al.,
2020) and consumers’ perception of product qual-
ity (Cumming, Ge and Lai, 2020).
Toa broad extent, social trust has long been rec-
ognized as an important driver for economic per-
formance and nancial market development (Ag-
garwal and Goodell, 2014; Arrow, 1972; Baneld,
1958; Goodell, 2019; Guiso, Sapienza and Zin-
gales, 2004, 2008; Karolyi,2016; Knack and Philip,
1997; La Porta et al., 1997; Qiu, Yu and Zhang,
2019). Specically, Karolyi (2016) notes the un-
canny tendency of Hofstede dimensions to be ev-
idenced by researchers to impact nancial out-
comes in ways consistent with theoretical expecta-
tions. Goodell (2019) reviews the cultural nance
literature from the viewpoint that cultural differ-
ence can inuence nancial systems both uncon-
sciously, as present in historically evolved mind-
sets, as well as by astute managers of multina-
tional corporations (MNCs) considering how to
adapt policies to local cultures to achieve op-
timal outcomes. Additionally, as highlighted by
Goodell (2019), the extensive literature on the -
nancial impacts of cultural distance is founded
on the notion that greater (lesser) cultural dis-
tance is analogous to lesser (greater) trust be-
tween counterparties. Fukuyama (1995) and Ag-
garwal and Goodell (2009) further posit that cul-
tural dimensions and social trust impact the trans-
action costs of vetting the asymmetric informa-
tion inherent in all, necessarily incomplete, con-
tracts (Hart and Moore, 1999). As nancial sys-
tems form a nexus of contracts, social trust is nat-
urally expected to inuence nancial systems very
broadly.
In the current study, we theorize and empiri-
cally investigate the effect ofsocial trust on cor-
porate dividend payouts – an important decision
for all corporations. Although mainstream divi-
dend theories do not explicitly identify trust as
a main determinant of dividends, the root cause
can be traced back to trust, as Arrow (1972)
states that virtually every commercial transaction
has within itself an element oftrust. Specically,
the agency theory of dividend, which is devel-
oped under imperfect markets, implicitly assumes
that when managers are not (or less) trustworthy,
they behave opportunistically to pursue perquisite
consumption or fund pet projects at the expense
of shareholders. Thus, disgorging cash to share-
holders through dividends alleviates the agency
issue by restraining managers’ opportunistic be-
haviour (Easterbrook, 1984; Jensen, 1986; Jensen
and Meckling, 1976). From a transaction cost per-
spective, Fukuyama (1995) notes that less trust
implies a greater need for vetting. This is exacer-
bated in the presence of asymmetric information,
with contracts being inevitably incomplete (Goer-
gen et al., 2013; Hart and Moore,1999). Thus, pay-
ing dividends becomes a necessary mechanism for
shareholder protection (Bank, Chefns and Go-
ergen, 2009; Da Silva, Goergen and Renneboog,
2004). In contrast, Miller and Modigliani’s (1961)
dividend-irrelevant theory assumes perfect mar-
ket conditions, under which trust is a non-issue
(Hirschman, 1982). Thus, payingdividends is irrel-
evant since managersare expected to make optimal
decisions on behalf ofshareholders.1
1A potential question is whydo the recipients ofdividends
(investors)care about the social trust in the company head
ofce’s region? Do they even know about it? This can be
justied by a large literature, which shows that investors
and consumers judge companies based on the rm’s ge-
ographic locations or industry afliationsdue to heuris-
tics or ‘mental short-cuts’. Specically, Kotler and Gert-
ner (2002) show thatplace images or knowledge structures
relatedto places are commonly used as ‘mental short-cuts’
for information processing. Dutton and Dukerich (1991)
and Camagni (2002) nd a direct link and dynamic rela-
tion between the image of the rm and the image ofits
local region. Lanzolla and Frankort (2016) and Chinta-
gunta and Chu (2021) provide further evidence that buy-
ers form their impressions about sellers based on the sell-
ers’ geographic location. Brown et al. (2021) nd that the
© 2022 British Academy of Management.
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