Is It Worth Trusting Your Manager?
39 Pages Posted: 26 Sep 2015 Last revised: 23 Mar 2016
Date Written: January 1, 2016
Recent work has emphasized that trust between parties may sustain relational governance, but we need further understanding and empirical evidence of the role of trust in principal-agent relationships. Our paper contributes to the literature by focusing on the asymmetry of trust between an owner and a manager, which may for example arise because owners and managers come from regions with different trust levels. We find that a firm does almost equally well when the owner and the managers come from regions with equal trust (equal trust) and when the owner comes from a region with higher trust (over-trust). However, firm performance is significantly lower when the owner comes from a region with lower trust than that of the manager (under-trust). Moreover, this negative effect is particularly strong when communication between an owner and a manager is more difficult and when the difference in trust is less evident up front.
Keywords: entrepreneurs, top managers, trust, firm performance
JEL Classification: M1, M13, F22, F23
Suggested Citation: Suggested Citation