Trust and stock price crash risk: Evidence from China |
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| Institution: | 1. School of Public Finance and Taxation, Central University of Finance and Economics, Beijing, China;2. School of Business, Renmin University of China, China\n;1. School of Accountancy, Central University of Finance and Economics, 39 South College Road, Haidian District, Beijing, 100081, China;2. Gabelli School of Business, Fordham University, 113 West 60th Street, New York, NY, 10023, United States;1. School of Business, Renmin University of China, China;2. School of Accountancy, Central University of Finance and Economics, China;3. Business School, Hunan University, No. 109 Shijiachong Road, Yuelu District, Changsha, Hunan 410006, China;1. School of Accounting and Finance, University of Waterloo, 200 University Avenue West, Waterloo, ON, N2L 3G1, Canada;2. John Molson School of Business, Concordia University, 1450 Rue Guy, Montréal, QC H3H 0A1, Canada |
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| Abstract: | This paper examines the impact of social trust on stock price crash risk. Social trust measures the level of mutual trust among the members of a society. Using a large sample of Chinese listed firms for the 2001–2015 period, we find that firms headquartered in regions of high social trust tend to have smaller crash risks. This result is robust to a battery of sensitivity tests and is more prominent for State-Owned Enterprises (SOEs), for firms with weak monitoring, and for firms with higher risk-taking. Moreover, we observe that firms in regions of high social trust are associated with higher accounting conservatism and fewer financial restatements. Our study suggests that social trust is an important variable that is omitted in the literature investigating the predictors of stock price crashes. |
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