Societal Trust and Corporate Investment Efficiency

24 Pages Posted: 14 Feb 2019 Last revised: 24 Aug 2023

See all articles by Linus Owusu Afriyie

Linus Owusu Afriyie

Xiamen University

Solomon W.D. Adza

Hong Kong Polytechnic University

Date Written: January 6, 2019

Abstract

The prior literature establishes that trust affects investment, however, whether it leads to investment efficiency is unaddressed. This study seeks to investigate the relationship between societal trust and corporate investment efficiency. The study documents a positive association between societal trust and corporate investment efficiency. Using data from 30 diverse countries, we present evidence that societal trust is positively related to firm’s overinvestment but has a negative relationship with firm’s under-investment. Further analysis of this study also posits a stronger relationship between trust and firm's investment efficiency for financing constraint firms. We interpret these findings as supportive evidence that higher trust is related to favorable outcomes, some being good earnings quality and greater reliability of earnings news. Furthermore, this study from the perspective of social capital literature provides an alternative explanation to investors investment decisions regarding the economic consequences of enhanced trust.

Keywords: Societal Trust, Investment Efficiency, Overinvestment, Underinvestment

JEL Classification: G30, M40, M14

Suggested Citation

Afriyie, Linus Owusu and Adza, Solomon W.D., Societal Trust and Corporate Investment Efficiency (January 6, 2019). Available at SSRN: https://ssrn.com/abstract=3329039 or http://dx.doi.org/10.2139/ssrn.3329039

Linus Owusu Afriyie (Contact Author)

Xiamen University

Xiamen, Fujian 361005
China

Solomon W.D. Adza

Hong Kong Polytechnic University ( email )

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