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Are entrepreneurial and managerial trust and banks' risk-taking behavior related? Empirical evidence from China

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  • Fonseka, Mohan
  • Richardson, Grant

Abstract

This study examines the relationship between entrepreneurial and managerial trust (EMT) on banks' risk-taking behavior in China. We provide evidence that the effect of EMT on bank risk-taking is a curvilinear (U-shaped) relationship. As EMT increases, bank risk-taking decreases before rising at the bank headquarters level, which permeates to the branch level. Moderating obseeffects analyses of bank characteristics indicate that the curvilinear relationship is stronger for state-owned, large, less efficient, and high non-interest income banks. Furthermore, moderating effects analyses of institutional characteristics show that the curvilinear relationship is stronger for banks in provinces with high institutional efficiency, government and market regulation, and law enforcement levels. However, we find that the introduction of a deposit insurance policy in China does not change the relationship between EMT and bank risk-taking behavior. Overall, our result of a curvilinear relationship helps answer the empirical puzzle about the contrasting positive and negative influences of trust on banks' risk-taking behavior found in prior research.

Suggested Citation

  • Fonseka, Mohan & Richardson, Grant, 2025. "Are entrepreneurial and managerial trust and banks' risk-taking behavior related? Empirical evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:pacfin:v:91:y:2025:i:c:s0927538x25000629
    DOI: 10.1016/j.pacfin.2025.102725
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    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • Z1 - Other Special Topics - - Cultural Economics

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