Impacts of trust on the cost of debt financing: The perspectives of in-group trust and out-group trust

Abstract

This paper explores the impact of different types of trust on the cost of debt financing. Using trust data from the World Values Survey (WVS) and data on the listed companies in China, we find that in-group (out-group) trust has a positive (negative) impact on the cost of debt financing. We also establish that better corporate performance strengthens the impacts of the two types of trust, and higher external supervision weakens the impact of out-group trust. Further investigation finds that in-group (out-group) trust significantly impacts companies with weak (strong) financing constraints.