Does social trust affect international contracting? Evidence from foreign bond covenants

Paul Brockman (), Sadok El Ghoul, Omrane Guedhami () and Ying Zheng ()
Additional contact information
Paul Brockman: Lehigh University
Omrane Guedhami: University of South Carolina
Ying Zheng: Bryant University

Journal of International Business Studies, 2022, vol. 53, issue 6, No 2, 1044 pages

Abstract: Abstract Building on rational choice institutionalism theory and Williamson’s (J Econ Lit 38(3): 595–613, 2000) four-level social analysis framework, we investigate the influence of the informal institution of social trust on debt contract design in an international setting. Using a sample of non-U.S. firms that issue bonds in the U.S. debt market, we find that Yankee bond creditors impose fewer covenants on bond issuers domiciled in countries with a high degree of social trust. We further show that the inverse relationship between debt covenants and the informal institution of social trust is more pronounced for firms from countries with weak formal institutions, as well as for firms with poor corporate governance and greater information opacity. These findings are robust to endogeneity tests, within-country analysis, various empirical models and measures of trust, and alternative hypotheses. We also show that, while a lower level of informal social trust is associated with higher borrowing costs, this relationship weakens when formal covenants are added to the debt contract (i.e., a substitution effect). Our paper contributes to the international business literature by providing new insights into the role of informal institutions (social trust) in cross-border debt contracting.

Keywords: informal institutions; social trust; formal institutions; corporate governance; contracts; covenants (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://link.springer.com/10.1057/s41267-020-00348-4 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:jintbs:v:53:y:2022:i:6:d:10.1057_s41267-020-00348-4

Ordering information: This journal article can be ordered from
http://www.springer. ... nt/journal/41267/PS2

DOI: 10.1057/s41267-020-00348-4

Access Statistics for this article

Journal of International Business Studies is currently edited by John Cantwell

More articles in Journal of International Business Studies from Palgrave Macmillan, Academy of International Business
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().