Abstract: Paying less cash dividend is one type of pledging shareholders’ opportunistic behaviour. Previous literature leaves unclear evidence about the impacts of share pledging on such firm-level decisions. Using the data of listed firms between 2014 and 2020 in China, we fill this void by examining the relationship between share pledging and cash dividend payouts from the perspective of social trust. Using a Heckman two-stage model, we find that share-pledging firms are less likely to pay cash dividend and the cash dividend payout is negatively related to pledged shares. We employ a hierarchical linear model and find that the level of social trust positively moderates the relationship between share pledging and cash dividend payout. Further, we find the effect is more pronounced for firms with higher free cash flows. The results indicate that social trust reduces the moral risk of pledging shareholders of listed firms in emerging market.

Keywords: share pledging; social trust; hierarchical linear model; cash dividend payout