Societal Trust and Corporate Underinvestment

31 Pages Posted: 5 Jun 2023

See all articles by Andreas Knetsch

Andreas Knetsch

Leibniz Institute for Financial Research SAFE; RWTH Aachen University

Astrid Juliane Salzmann

Catholic University of Lille - IESEG School of Management; RWTH Aachen University - Department of Finance

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

Knetsch, Andreas and Salzmann, Astrid Juliane, Societal Trust and Corporate Underinvestment (March 20, 2021). Global Finance Journal, Vol. 54, 2022, Available at SSRN: https://ssrn.com/abstract=4468833

Andreas Knetsch (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

RWTH Aachen University ( email )

Templergraben 55
52056 Aachen, 52056
Germany

Astrid Juliane Salzmann

Catholic University of Lille - IESEG School of Management ( email )

Socle de la Grande Arche
1 Parvis de la Defense
Puteaux, Paris 92800
France

RWTH Aachen University - Department of Finance ( email )

Templergraben 64
Aachen, 52056
Germany

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