Societal Trust and Corporate Underinvestment
31 Pages Posted: 5 Jun 2023
Date Written: March 20, 2021
Abstract
We extend prior literature by showing that societal trust is a significant determinant of corporate investment policy. Firms in countries with a higher level of societal trust are less prone to underinvestment. We posit that the association between trust and underinvestment relates to a reduction of financial constraints. However, when we split our sample using different proxies for the level of financial constraints, we document that trust has an additional effect on underinvestment beyond enhanced access to capital. Consistent with the view that trust and conventional forms of governance are substitutes, we demonstrate that the effect of trust on underinvestment is reduced for firms in countries with strong investor protection.
Keywords: Trust, underinvestment, culture
JEL Classification: G30, G41
Suggested Citation: Suggested Citation