Does societal trust make managers more trustworthy?

Lisi Shi, Kung-Cheng Ho and Ming-Yu Liu

International Review of Financial Analysis, 2023, vol. 86, issue C

Abstract: This study examines the effects of shareholders' trust on managers' bad news hoarding. Using a large sample of listed firms from 33 countries, we find that firms domiciled in countries with higher societal trust have higher stock price crash risk, which indicates that managers may exploit shareholders' trust to conceal bad news and that a low-trust society can be beneficial in restraining management misconduct due to the monitoring undertaken by low-trust outsiders. We also find that the positive association between societal trust and crash risk is less pronounced (1) when low-trust foreign shareholders have greater control over a country's firms, in line with the view that low-trust shareholders' concerns about being expropriated by managers and the consequent strong efforts at monitoring; (2) when long-term investors have greater control over a country's firms, suggesting that long-term investors playing a complementary role in monitoring corporate governance; and (3) when a country has strong formal institutions, such as investor protection and financial accounting systems, suggesting that robust formal institutions are substitute for social norms.

Keywords: Trust; Bad news hoarding; Crash risk; Corporate governance; Formal institutions (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 Z13 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:86:y:2023:i:c:s1057521923000534

DOI: 10.1016/j.irfa.2023.102537

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