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The Trust Triangle: Laws, Reputation, and Culture in Empirical Finance Research

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  • Quentin Dupont

    (University of Washington)

  • Jonathan M. Karpoff

    (University of Washington)

Abstract

We propose a construct, the Trust Triangle, that highlights three primary mechanisms that provide ex post accountability for opportunistic behavior and motivate ex ante trust in economic relationships. The mechanisms are (i) a society’s legal and regulatory framework, (ii) market-based discipline and reputational capital, and (iii) culture, including individual ethics and social norms. The Trust Triangle provides a framework to conceptualize the relationships between trust, corporate accountability, legal liability, reputation, and culture. We use the Trust Triangle to summarize recent developments in the empirical finance literature that examine how trust is formed and how trust, or its absence, affects financial markets, firm performance, and the incidence of financial fraud. To date, most studies examine only one leg of the Trust Triangle in isolation. The evidence, however, indicates that all three legs of the Trust Triangle have first-order effects on a wide range of financial outcomes and that they are interrelated. Attempts to model trust and trustworthiness that do not incorporate all three aspects of the Trust Triangle will therefore miss essential aspects of the basic economic problem of how counterparties overcome the risks of moral hazard, asymmetric information, and opportunism to engage in mutually beneficial exchange and production activities. We focus especially on culture-related mechanisms, a recently developed area in empirical finance research that has potential to influence the more established research on laws and reputation.

Suggested Citation

  • Quentin Dupont & Jonathan M. Karpoff, 2020. "The Trust Triangle: Laws, Reputation, and Culture in Empirical Finance Research," Journal of Business Ethics, Springer, vol. 163(2), pages 217-238, May.
  • Handle: RePEc:kap:jbuset:v:163:y:2020:i:2:d:10.1007_s10551-019-04229-1
    DOI: 10.1007/s10551-019-04229-1
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    4. Ho, Kung-Cheng & Yen, Huang-Ping & Gu, Yan & Shi, Lisi, 2020. "Does societal trust make firms more trustworthy?," Emerging Markets Review, Elsevier, vol. 42(C).
    5. 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.
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    More about this item

    Keywords

    Trust; Accountability; Opportunism; Fraud; Reputation; Culture;
    All these keywords.

    JEL classification:

    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
    • Z10 - Other Special Topics - - Cultural Economics - - - General

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