The bright side of social trust and entrepreneurial finance

Abstract

A growing number of studies in the past two decades suggest that social trust matters for financing. However, a few recent studies also indicate that social trust may result in systemic biases and opportunistic behavior. First, we show that trust is important for several types of entrepreneurial financing. Second, our results reveal that trust plays an essential role in start-up financing in places with low access to information, low disclosures, and weaker legal protection. However, in countries with stronger legal protections, the effect of trust is either insignificant or negative. Hence, trust takes on the role of a substitute and may not necessarily bring benefits when strong formal institutions are present.