Does social capital affect dividend policy?

Recent studies find that nonmonetary values such as culture, norm, or religion affect corporate payout policies. Thus, this study introduces a “social capital” factor and examines its effect on the decisions to pay dividends. I argue that social capital influences the dividend policy through two channels: directly by affecting behavior and indirectly by reducing opportunity cost. First, in a region with high social capital, a board better caters with the investors’ preference for a “bird-in-the-hand” dividend. Second, social capital reduces the capital cost that then lowers the incentive to hoard cash for security reasons, which thus increases the incentive to pay dividends. I find a positive association between social capital and dividends, and this association is stronger for firms with weak governance. The results hold after several robustness checks. Furthermore, a proportional hazard model indicates that firms located in high social capital areas are more likely to initiate dividends sooner.