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Trust and the regulation of corporate self-dealing

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  • Cline, Brandon N.
  • Williamson, Claudia R.

Abstract

The economic impact of corporate self-dealing and the regulation against such activity both vary across countries. In this work, we examine the influence of trust on shareholder protection. We hypothesize that anonymous trust can affect self-dealing through two channels. First, trust may complement existing formal regulation. Alternatively, trust and formal regulation can act as substitutes. To test these hypotheses, we examine the association between a country's anti-self-dealing index and anonymous trust. We find that anonymous trust inversely relates to formal self-dealing regulation. We further find that anonymous trust positively relates to financial market development. Collectively, this evidence suggests that trust substitutes for formal self-dealing regulation, providing an alternative mechanism for shareholder protection.

Suggested Citation

  • Cline, Brandon N. & Williamson, Claudia R., 2016. "Trust and the regulation of corporate self-dealing," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 572-590.
  • Handle: RePEc:eee:corfin:v:41:y:2016:i:c:p:572-590 DOI: 10.1016/j.jcorpfin.2016.07.016
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    1. repec:eee:corfin:v:46:y:2017:i:c:p:284-306 is not listed on IDEAS

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    Keywords

    Trust; Informal institutions; Shareholder protection; Anti-self-dealing; Corporate governance;

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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