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Social Trust and Corporate Misconduct: Evidence from China

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Abstract

We study whether greater social trust is associated with a lower incidence of corporate misconduct. Both social norm and network theory suggest that social trust can affect managerial behavior and reduce the likelihood of misconduct behavior. Consistent with this prediction, we find that social trust is negatively associated with corporate misconduct behavior. Moreover, we show that, when media coverage is higher, the negative relation between social trust and corporate misconduct behavior is more pronounced. Further analyses suggest that social trust can help mitigate both disclosure-related and nondisclosure-related misconduct.

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Notes

  1. Please refer to http://en.people.cn/90882/8090290.html and http://www.chinadaily.com.cn/china/2013-02/18/content_16230755.htm.

  2. The survey was jointly conducted by Xiaokang Magazine and Tsinghua University Media Lab. For details, see http://baike.baidu.com/view/11835116.htm.

  3. We do not attempt to disentangle the effect of the norm from that of the network; rather, we focus on how the common meanings of two views mitigate agency problems.

  4. For example, Chen et al. (2013) find that firms with accounting restatements experience difficulties in raising external financing.

  5. See, for example, Dyck and Zingales (2002), Miller (2006), Dyck et al. (2008), Du et al. (2015), and Wang and Ye (2015). In addition, media coverage increases the probability and cost of firms being fined (Dyck et al. 2008).

  6. We thank one reviewer for pointing out this channel through which media coverage moderates the relation between social trust and corporate misconduct.

  7. This question is similar to that in the World Value Surveys: “Generally speaking, would you say that most people can be trusted or that you need to be very careful in dealing with people?”.

  8. Two provinces, Xizang (Tibet) and Qinghai, were not included in the 2013 report because there were very few firms in these two provinces. In addition, the report did not include Taiwan, Hong Kong, or Macao, due to differences in their constitutions.

  9. We thank the reviewer for suggesting this robustness test.

  10. Following Clogg et al. (1995) and Chen et al. (2010), we use Z-statistics to test the significance of the differences in regression coefficients between the two subsamples.\( Z = {{\left( {\hat{\beta }_{1} - \hat{\beta }_{2} } \right)} \mathord{\left/ {\vphantom {{\left( {\hat{\beta }_{1} - \hat{\beta }_{2} } \right)} {\sqrt {S^{2} \left( {\hat{\beta }_{1} } \right) + S^{2} \left( {\hat{\beta }_{2} } \right)} }}} \right. \kern-0pt} {\sqrt {S^{2} \left( {\hat{\beta }_{1} } \right) + S^{2} \left( {\hat{\beta }_{2} } \right)} }}, \) where \( \hat{\beta }_{1} \) and \( \hat{\beta }_{2} \) are the coefficients of STRUST estimated from the two subsamples, and \( S^{2} \left( {\hat{\beta }_{1} } \right) \) and \( S^{2} \left( {\hat{\beta }_{2} } \right) \) are the squared standard errors of \( \hat{\beta }_{1} \) and \( \hat{\beta }_{2} \), respectively.

  11. To conserve space, the results are not tabulated. They are available upon request.

  12. We thank one reviewer for suggesting this test to disprove an alternative explanation by controlling for wealth, education levels, and local religion.

  13. Data are available at http://www.stats.gov.cn/english/statisticaldata/AnnualData/.

  14. For details, please see Du (2013) and the Appendix for variable definitions.

  15. We thank an anonymous reviewer for suggesting this subsample test.

  16. We thank an anonymous reviewer for pointing out this possibility and suggesting this test.

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Acknowledgments

We acknowledge the helpful comments from two anonymous reviewers. Wang Dong acknowledges financial support from the National Natural Science Foundation of China (Grant Numbers NSFC-71302060 and NSFC-71332008). Hongling Han acknowledges the research grants from the National Natural Science Foundation of China (Grant Number NSFC-71272168) and from the Zhejiang Provincial Natural Science Foundation of China (Grant Number Y6110216). The usual caveats apply.

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Authors and Affiliations

  1. Department of Accounting and Finance, Zhejiang University, Hangzhou, China

    Wang Dong & Hongling Han

  2. Department of Accounting, Brock University, St. Catharines, Canada

    Yun Ke

  3. Department of Finance, Western Kentucky University, Bowling Green, KY, 42101, USA

    Kam C. Chan

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  1. Wang Dong
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  2. Hongling Han
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Corresponding author

Correspondence to Hongling Han.

Appendix

Appendix

See Tables 10, 11.

Table 10 Trust index for provinces in China from Wang et al. (2013)
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Table 11 Variable definitions
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Dong, W., Han, H., Ke, Y. et al. Social Trust and Corporate Misconduct: Evidence from China. J Bus Ethics 151, 539–562 (2018). https://doi.org/10.1007/s10551-016-3234-3

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