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Trust and the cost of debt financing

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  • Meng, Yijun
  • Yin, Chao

Abstract

This paper examines the relation between the level of trust in a country and the cost of debt. Using data on firms located in 22 countries over a 20-year period, we quantify the country trust level and find strong evidence that firms in countries with a higher level of societal trust have lower bond yield spreads. We also find that the impact of trust on the cost of debt is more pronounced in countries with a poor governance environment and during a time of financial crisis. Overall, our results highlight the role of social capital in shaping corporate financial behavior.

Suggested Citation

  • Meng, Yijun & Yin, Chao, 2019. "Trust and the cost of debt financing," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 59(C), pages 58-73.
    • Handle: RePEc:eee:intfin:v:59:y:2019:i:c:p:58-73
    DOI: 10.1016/j.intfin.2018.11.009
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    More about this item

    Keywords

    Societal trust; Social capital; Bond yield spreads; Informal institutions;
    All these keywords.

    JEL classification:

    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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