Abstract
This paper studies the effect of trust on the perceived credibility of earnings news. Using earnings response coefficients, we find that firms located in low-trust regions of the United States experience significantly lower stock price reactions to earnings news. Additional tests indicate that managers can counterbalance investors’ dependence on trust by employing reputable auditors or signaling the quality of their earnings using dividends to improve the perceived credibility of their financial reports. Overall, our findings suggest that trust affects the pricing of earnings news in capital markets. This paper was accepted by Brian Bushee, accounting. Funding: This work was supported by Ministry of Education (Singapore) [Grant RG161/14]. Supplemental Material: Data and the online appendix are available at https://doi.org/10.1287/mnsc.2022.4569 .
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