Is It Worth Trusting Your Manager?

Abstract

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