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Stock liquidity and societal trust

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  • Zadeh, Mohammad Hendijani

Abstract

Stock liquidity is a sign of market efficiency and a crucial factor of a well-functioning market. Using US data, we present empirical evidence that a company’s stock liquidity is positively associated with regional societal trust. Further analyses indicate that this relationship becomes stronger when companies are more opaque and weakly governed. Regional societal trust as an informal monitoring mechanism is captured with county-level social capital that has two aspects of ethical norms and solid social networks. These aspects bring about trust, reciprocity, honesty, transparency, and organizational citizenship that is ultimately reflected in higher firms’ stock liquidity. We also identify a potential channel through which we can explain the positive association between a company’s stock liquidity and regional societal trust Particularly, we report that companies located in high societal trust areas provide more accurate management earnings guidance. Ultimately, we find that companies situated in high societal trust areas have lower cost of equity capital as they have better access to equity market financing through stock liquidity.

Suggested Citation

  • Zadeh, Mohammad Hendijani, 2023. "Stock liquidity and societal trust," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    • Handle: RePEc:eee:beexfi:v:37:y:2023:i:c:s2214635022000612
    DOI: 10.1016/j.jbef.2022.100731
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