Social trust and stock price crash risk: Evidence from China

- We study the relation between social trust and stock price crash risk.
- Social trust and stock price crash risk are negatively correlated.
- Our findings are robust.
- Social trust and other formal institutional monitoring are partial substitutes.
- Social trust, as a socioeconomic factor, relates to crash risk.

We study the relation between social trust and stock price crash risk using a sample of Chinese publicly traded A-share stocks during 2001-2012. The crash-prone environment and China's culturally and economically diverse society provide a good background for the examination. We document that (1) social trust and stock price crash risk are negatively correlated and (2) this relation is less pronounced for firms with greater analyst coverage or high institutional ownership. Our findings are robust to alternative measures of crash risk and social trust and additional control variables. Our results also indicate that, as an informal institution, social trust and other formal institutional monitoring mechanisms are partial substitutes. Social trust, as a socioeconomic factor, relates to crash risk.