Abstract

This thesis investigates if social capital, the internal norm of trustworthiness, acts as an external agency-mitigating determinant of corporate payout policy by using the variations in social capital in US states. A large sample of US firms containing 50,847 firm-year observations representing 7,840 unique firms, covering the period from 1998 to 2014, is used to explore the main idea of the thesis. Overall, this thesis provides support for the conjecture that firms, on average, pay higher dividends if they are headquartered in states with a higher social capital environment and that the influence of social capital is stronger when external monitoring is weak. The association between social capital and firm dividends is found to be both statistically and economically significant. It is further shown that this relationship between social capital and firm dividends is not spurious as these results are robust to: additional controls, propensity score matching, instrumental variable approach, quasi-natural experiments, and alternate measures of main dependent and research variables. This thesis adds to the explanation of the long-standing ‘dividend puzzle’ by showing association between the social environment of a firm and its managerial decisions in the presence of micro external monitors such as institutional investors.