Does societal trust affect corporate capital structure?

Abstract

This study examines whether societal trust diminishes the role that debt plays to mitigate agency problems between managers and shareholders. Using data from 46 countries, we find that societal trust is inversely associated with leverage ratio. Our results are robust to a battery of robustness tests. We also observe that societal trust can substitute for formal institutions, and therefore, the impact of societal trust is weaker for firms located in countries with strong legal institutions. Overall, our study emphasizes the role of informal institutions like societal trust in resolving agency problems stemming from the conflict of interest between shareholders and managers.