Social Trust and Stock Price Crash Risk: Evidence from China

Research paper by Chunfang Cao, Changyuan Xia; Kam C. Chan

Indexed on: 21 Oct '16Published on: 17 Sep '16Published in: International Review of Economics & Finance


Publication date: Available online 13 September 2016 Source:International Review of Economics & Finance Author(s): Chunfang Cao, Changyuan Xia, Kam C. Chan We study the relation between social trust and stock price crash risk using a sample of Chinese publicly traded A-share stocks during 2001–2012. The crash-prone environment and China's culturally and economically diverse society provide a good background for the examination. We document that (1) social trust and stock price crash risk are negatively correlated and (2) this relation is less pronounced for firms with greater analyst coverage or high institutional ownership. Our findings are robust to alternative measures of crash risk and social trust and additional control variables. Our results also indicate that, as an informal institution, social trust and other formal institutional monitoring mechanisms are partial substitutes. Social trust, as a socioeconomic factor, relates to crash risk.