Social trust and the speed of corporate leverage adjustment: evidence from around the globe

Abstract

AbstractWe examine the relation between social trust and the speed of leverage adjustment (SOA) around the world. Using a large international sample (65 countries, 1996–2016), we find that social trust has a positive effect on SOA. In the cross section, we find that the positive effect of social trust on the SOA is more pronounced for: (i) over‐levered firms; (ii) firms with higher information asymmetry; (iii) firms with lower ease of financing; and (iv) firms located in countries with weaker governance quality. Overall, we highlight the role of social trust in shaping corporate capital structure.