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

Posted: 16 Feb 2018 Last revised: 4 Sep 2018

See all articles by Paul Brockman

Paul Brockman

Lehigh University - College of Business & Economics

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

This paper investigates the influence of social trust on security-level contract design. Using a sample of non-U.S. firms issuing bonds in U.S. debt markets, we find that U.S.-based 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 social trust and debt covenants is more pronounced for firms from countries with weak institutions, for firms with poor corporate governance, and for more opaque firms. These findings are robust to endogeneity tests, within-country analysis, and alternative empirical models, measures of trust, and explanations. We also find that a higher level of social trust is associated with lower borrowing costs, but this relation weakens when covenants are included in the debt contract.

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 & Economics ( 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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