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Does societal trust affect corporate capital structure?

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  • Chauhan, Yogesh
  • Jaiswall, Manju
  • Goyal, Vinay

Abstract

This study examines whether societal trust diminishes the role that debt plays to mitigate agency problems between managers and shareholders. Using data from 46 countries, we find that societal trust is inversely associated with leverage ratio. Our results are robust to a battery of robustness tests. We also observe that societal trust can substitute for formal institutions, and therefore, the impact of societal trust is weaker for firms located in countries with strong legal institutions. Overall, our study emphasizes the role of informal institutions like societal trust in resolving agency problems stemming from the conflict of interest between shareholders and managers.

Suggested Citation

  • Chauhan, Yogesh & Jaiswall, Manju & Goyal, Vinay, 2022. "Does societal trust affect corporate capital structure?," Emerging Markets Review, Elsevier, vol. 51(PA).
    • Handle: RePEc:eee:ememar:v:51:y:2022:i:pa:s1566014121000534
    DOI: 10.1016/j.ememar.2021.100845
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    More about this item

    Keywords

    Societal trust; Capital structure; agency problem; Informal institutions; Leverage ratio;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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