Work

Trust and monitoring

Year: 2022

Type: article

Abstract: We show that in countries with more societal trust shareholders cast fewer votes at shareholder meetings and are more supportive of management proposals. This result is confirmed by instrumental variable regressions. It also holds at the U.S.-county level and for voting by U.S. institutional investors. Lower monitoring via voting relates less negatively to future firm performance in high-trust countries, suggesting that managers do not exploit greater discretion when trust is high. We also find a negative relation between trust and bond spreads. Our evidence supports theory arguing that trust substitutes for monitoring and has implications for investors’ optimal monitoring effort.

Source: Journal of Banking & Finance

DOI: 10.1016/j.jbankfin.2022.106587

Authors: Simon Lesmeister, Peter Limbach, Marc Goergen

Institutions: University of Cologne, Bielefeld University, IE University, European Corporate Governance Institute

Language: English

Topic: Corporate Finance and Governance

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Peace, justice, and strong institutions

Open Access status: hybrid

Estimated APC paid: $2,620