Societal Trust And Corporate Risk-Taking

Using an international sample of 335809 manufacturing firm-year observations from 47 countries and employing ordinary least square regressions,I explore the impact societal trust has on corporate risk-taking-a conscientious effort to shift the focus of the contemporary corporate finance research that focuses on managerial incentive for corporate risk-taking to the cultural context within which those decisions are made.I hypothesize that societal trust impacts corporate risk-taking via its effects on formal institutions of a given country and managerial decision-making.Besides,I proxy managerial discretion by earnings discretion and propose that the impact of societal trust is governed by the degree of such firm-level features.I show that societal trust negatively affects corporate risk-taking through three specific channels:financial transparency,trust reciprocity,and management compensation structure,depicting firms and managers domiciled in high-trust societies to behave pro-socio.I again show that societal trust's impact on corporate risk-taking is profound in weaker formal institutions countries particularly in the post Enron/WorldCom era,and the impact of societal trust on corporate risk-taking is heightened in firms with greater managerial discretion.I infer that,even in the presence of heightened globalized market economies with revolutionized professionalism,the cultural context in general,and societal trust in particular,of a given society/country often determine and influence the way firms make decisions.Consequently,the findings of this study can be adapted to enhance the practice of international management principles.My results remain robust to a series of sensitivity tests.