Essays on Corporate Finance and Social Capital: Dividend Policy, Capital Structure, and Corporate Risk-Taking

The literature on social capital and corporate financial decisions has attracted increasing interest from academia and corporate decision makers. However, the interest in social capital faces some obstacles, together with the lack of a unified measure of it, which add to the complexity of the studies that have considered the topic and related factors. In particular, the corporate finance literature asserts that social capital needs to be investigated carefully by considering its attributes in relation to corporate finance decisions (García-Feijóo et al., 2021; Oyotode-Adebile and Ujah, 2021; Hasan et al., 2020; Javakhadze et al., 2016b). Accordingly, this thesis adds to the extant literature by contributing three empirical essays on the relationship between social capital and corporate finance decisions.

The first essay investigates the relationship between managerial social capital (MSC) and corporate dividend policy with regard to FTSE 350 Index firms during the period 2006-2017. It is argued that the MSC alleviates information asymmetry and agency problems as a source of value and trust and a channel of information. Using data from the BoardEx database on executives and directors, the study builds an index of MSC based on four sources of connections: current employment, past employment, education, and other social activities. Coupled with financial data from the DataStream database, the study uses a sample of panel data that consists of 3638 firm-year observations. Logit and tobit estimations are employed after controlling for governance and financial variables to ascertain the relationship between MSC and corporate dividend policy. The findings suggest that MSC is a significant determinant of firms' dividend policy. The results are consistent with the substitution hypothesis, suggesting that firms distribute cash dividends to reflect a strong governance regime and to improve their reputation in the market. In addition, the results show that MSC facilitates access to information and the external environment, and that external directors can act as wealth creators.

The second essay examines the association between social capital and capital structure using unbalanced panel data for a sample of firms listed on the FTSE350 Index from 2006 to 2017. A multivariate regression framework is used, and the endogeneity problem controlled for to provide evidence of how social capital influences the capital structure of firms. After addressing previous research findings, the study focuses on the structural dimension of social capital. Accordingly, in this essay, an MSC variable has been calculated. The results of the research are based on the generalized method of moments model, which is applied for all the sample firms, and then samples of financial and non-financial firms have been used. After controlling for the capital structure of the firm, as captured by the ratio of total debt to the book value of total assets, and that of total debt to the market value of total assets, the results show that MSC has a positive and significant effect on firms' capital structure. This positive effect is consistent with the pecking order theory, showing that structural social capital alleviates information asymmetry between management and shareholders, resulting in a moderation of the costs of issuing new debts to finance new projects. Then, social capital motivates managers to consider debt financing in firms' capital structure. In addition, the study shows that the positive relationship is consistent with the outcome hypothesis, implying that social capital works as a governance mechanism which provides a strong monitoring tool. In addition, the study indicates that social capital alleviates agency problems and reduces information asymmetry. Moreover, the results of this study show that financial firms are different from non-financial firms, as the regression results report no significant impact of MSC on the capital structure of the firm. Consequently, important recommendations are made for firms, managers, investors, policymakers and other users of financial information related to the use of social capital as a vital variable that must be taken into consideration with regard to firms' debt policy.

The third essay examines the relationship between social capital and corporate risk using unbalanced panel data of publicly listed UK FTSE 350 firms for the period 2006-2017. The relationship between social capital and corporate risk is assessed through a multivariate regression framework and control of endogeneity sources. The main sample used includes financial and non-financial firms, which has been separated to distinguish between the two types of firms. Previous studies are discussed, and interesting evidence is provided to demonstrate that the direction of the relationship is based on the social capital dimension. This notion has not been explored in the previous studies, particularly in the context of a robust empirical setting that appropriately controls for endogeneity concerns. The findings of the study show that social capital is negatively related to corporate risk-taking, and that this is true under the three types of samples, that is, all firms, non-financial firms, and financial firms. This negative relationship can be explained by agency theory, implying that MSC can enhance the monitoring function and emphasise the access to information. In addition, the reputation hypothesis provides some explanations for this relationship, which illustrate that a high level of MSC forces managers to be concerned about their reputation in the external labour market, and this can make them more risk-averse. Furthermore, the results show that financial firms require further investigation in the future research. The results also indicate that social capital plays a role in shaping the effect of corporate governance and risk-taking. Accordingly, this study provides important implications for managers, firms and policymakers, and in particular, for prospective investors and analysts in relation to investment decisions and evaluation of firm risk. Moreover, the study demonstrates the importance of MSC in shaping future corporate governance regimes.