Trust and the regulation of corporate self-dealing

- We examine the influence of trust on shareholder protection.
- Test the association between a country's anti-self-dealing index and trust.
- Find anonymous trust negatively relates to self-dealing regulation.
- Anonymous trust positively relates to a financial development.
- Conclude trust can provide an alternative mechanism for shareholder protection.

The economic impact of corporate self-dealing and the regulation against such activity both vary across countries. In this work, we examine the influence of trust on shareholder protection. We hypothesize that anonymous trust can affect self-dealing through two channels. First, trust may complement existing formal regulation. Alternatively, trust and formal regulation can act as substitutes. To test these hypotheses, we examine the association between a country's anti-self-dealing index and anonymous trust. We find that anonymous trust inversely relates to formal self-dealing regulation. We further find that anonymous trust positively relates to financial market development. Collectively, this evidence suggests that trust substitutes for formal self-dealing regulation, providing an alternative mechanism for shareholder protection.