Social Capital and Stock Price Crash Risk: Cross-Country Evidence

Abstract

We use a comprehensive cross-country sample to investigate whether and how the country-level social capital influences the firm-level stock price crash risk. We document a negative and statistically significant effect, which is robust to various tests including IV estimations that account for endogeneity concerns. When we disaggregate social capital into its various components, we find that the results are driven by civic and social participation, institutional trust, and family relationships, whereas social networks and interpersonal trust do not appear to matter. Furthermore, we find that the impact of social capital is channeled through firm-level reporting opacity and price informativeness. Finally, the impact of social capital on stock price crash risk is moderated by formal institutions, like property rights and law and order.

Keywords: Stock price crash risk, Social capital, Informal institutions, Formal institutions