Trust and stock price crash risk: Evidence from China

This paper examines the impact of social trust on stock price crash risk. Social trust measures the level of mutual trust among the members of a society. Using a large sample of Chinese listed firms for the 2001-2015 period, we find that firms headquartered in regions of high social trust tend to have smaller crash risks. This result is robust to a battery of sensitivity tests and is more prominent for State-Owned Enterprises (SOEs), for firms with weak monitoring, and for firms with higher risk-taking. Moreover, we observe that firms in regions of high social trust are associated with higher accounting conservatism and fewer financial restatements. Our study suggests that social trust is an important variable that is omitted in the literature investigating the predictors of stock price crashes.