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Cross-Country Evidence on the Relationship between Societal Trust and Risk-Taking by Banks

Published online by Cambridge University Press:  20 September 2018

Kiridaran Kanagaretnam ,
Gerald J. Lobo ,
Chong Wang  and
Dennis J. Whalen
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Abstract

We study the relationship between societal trust and risk-taking in the banking industry. Prior literature has found that societal trust is positively related to both financial reporting conservatism and financial reporting transparency, which reduce bank managers’ ability to take excessive risk. Additionally, bank managers in high-trust countries are more likely to exhibit higher pro-social behavior and, therefore, less likely to take excessive risk for personal benefit. Consistent with these arguments, we document that banks in countries with higher societal trust exhibit lower risk-taking and that these banks also experienced less financial trouble and fewer failures during the 2007–2009 financial crisis.

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Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 1 , February 2019 , pp. 275 - 301
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Jarrad Harford (the editor) and an anonymous reviewer for their helpful suggestions. Kanagaretnam and Lobo thank the Social Sciences and Humanities Research Council of Canada (SSHRC) for its financial support.

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