This study examines the impact of trust on initial public offering (IPO) underpricing using a large sample of IPO firms in China. We find that firms in regions of high social trust have lower underpricing, consistent with the notion that IPO firms in low-trust regions have to offer greater underpricing to secure participation. This result is robust to a battery of sensitivity tests and after controlling for endogeneity using instrumental variables. We also find that the negative relation between social trust and underpricing is more prominent for small and growth firms, and firms in high-tech industries, consistent with trust playing a more important role in asymmetric information environments. This relation is less pronounced for firms with high insider ownership and political connections, suggesting that investors rely less on trust in these cases; it is less salient when firms are in regions with high quality legal institutions and high average education levels, consistent with trust being a substitute for formal institutions.

This paper examines the impact of social trust on stock price crash risk. Social trust measures the level of mutual trust among the members of a society. Using a large sample of Chinese listed firms for the 2001–2015 period, we find that firms headquartered in regions of high social trust tend to have smaller crash risks. This result is robust to a battery of sensitivity tests and is more prominent for State-Owned Enterprises (SOEs), for firms with weak monitoring, and for firms with higher risk-taking. Moreover, we observe that firms in regions of high social trust are associated with higher accounting conservatism and fewer financial restatements. Our study suggests that social trust is an important variable that is omitted in the literature investigating the predictors of stock price crashes.

We investigate the impact of excess perk consumption on crash risk in state-owned enterprises in China. To enjoy excess perks, executives in state-owned enterprises have an incentive to withhold bad news for extended periods, leading to higher future stock price crash risk. Consistent with this assertion, we find a positive correlation between excess perks and crash risk. The findings are robust to the inclusion of other determinants of crash risk identified in the literature, such as earnings management, conditional conservatism, and firm-level corporate governance mechanisms. The results still hold after accounting for possible endogeneity issues using a two-stage least squares estimation. Earnings management (conditional conservatism) helps amplify (lessen) this impact. Moreover, better external monitoring mitigates the impact of excess perks on firm crash risk. We further find that the impact of excess perks on crash risk is more pronounced in firms whose executives are approaching retirement and persists for at least two years.