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Journal of Financial and Quantitative Analysis Vol. 54 No. 1 2019

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

Kiridaran Kanagaretnam1,2,3,4,5; Gerald J. Lobo1,2,3,4,5; Chong Wang1,2,3,4,5; Dennis J. Whalen1,2,3,4,5

1 Hong Kong Polytechnic University · 2 York University · 3 Otterbein University · 4 University of Houston · 5 Social Sciences and Humanities Research Council

open access

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.

DOI
10.1017/s0022109018000455
Volume
54
Issue
1
Pages
275-301
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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