Societal trust and corporate risk-taking: International evidence

Zhe Shen, Joseph Sowahfio Sowah and Shan Li

Journal of International Financial Markets, Institutions and Money, 2022, vol. 76, issue C

Abstract: This paper empirically investigates the association between societal trust and corporate-level risk-taking using a large sample of 658,020 firm-years and 52,661 unique firms from 50 countries over the 1994–2020 period. We document robust evidence that corporate risk-taking tends to decrease with the level of societal trust, even after controlling for a wide range of factors at the firm, industry and country levels, using alternative measures for risk taking and societal trust, and addressing potential endogeneity problems associated with societal trust. We also find that the negative relationship is more pronounced for firms from countries with weaker formal institutions, for firms in industries with a greater extent of diversification, and for firms with greater managerial discretion. Taken together, our analysis highlights the importance of informal institutions in shaping corporate behavior.

Keywords: Societal trust; Corporate risk-taking; Formal institutions; Managerial discretion (search for similar items in EconPapers)
JEL-codes: G30 G31 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:76:y:2022:i:c:s1042443121001943

DOI: 10.1016/j.intfin.2021.101490

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