Social trust and the choice between bank debt and public debt: Evidence from international data

Sharif Mazumder and Ramesh Rao

Journal of Multinational Financial Management, 2023, vol. 67, issue C

Abstract: Motivated by existing research on the informational and monitoring role of social trust, we examine how social trust affects firms’ choice between bank debt and public debt. Using firm-level data from 33 countries, we document that higher social trust is associated positively (negatively) with the long-term public (bank) debt ratio. The findings are robust when we control for other important country-level and firm-level factors. There are two possible channels of this association. We find that social trust affects debt structure through monitoring and borrowers’ incentive channels. To address potential endogeneity, we use instrumental variables, propensity score and entropy balancing matching, and large change analyses and document that our findings are robust. Examining the effect of debt structure on firm performance, we find that Tobin's Q associates positively with long-term public debt ratios in high-trust countries.

Keywords: Social Trust; Debt Structure; Bank Debt; Public Debt (search for similar items in EconPapers)
JEL-codes: J30 J32 J38 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mulfin:v:67:y:2023:i:c:s1042444x22000524

DOI: 10.1016/j.mulfin.2022.100781

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