Does Social Trust Affect International Contracting? Evidence from Foreign Bond Covenants

Posted: 16 Feb 2018 Last revised: 1 Jun 2020

See all articles by Paul Brockman

Paul Brockman

Lehigh University - College of Business

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Omrane Guedhami

University of South Carolina - Moore School of Business

Ying Zheng

Bryant University

Date Written: May 22, 2018

Abstract

Building on rational choice institutionalism theory and Williamson’s (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 relation 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 relation 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: Trust; Contracts; Covenants; Institutions; Corporate Governance

JEL Classification: F30; G30; M41

Suggested Citation

Brockman, Paul and El Ghoul, Sadok and Guedhami, Omrane and Zheng, Ying, Does Social Trust Affect International Contracting? Evidence from Foreign Bond Covenants (May 22, 2018). Available at SSRN: https://ssrn.com/abstract=3118727 or http://dx.doi.org/10.2139/ssrn.3118727

Paul Brockman

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

Sadok El Ghoul (Contact Author)

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Ying Zheng

Bryant University

1150 Douglas Pike
Smithfield, RI 02917
United States
8033189733 (Phone)

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