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Trust and Stock Price Synchronicity: Evidence from China

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Abstract

This paper investigates how social trust affects stock price synchronicity using a large sample of listed firms in China. We propose and provide evidence that social trust has a significantly positive impact on the amount of firm-specific information capitalized into stock prices. Further analyses indicate that firms located in regions of high social trust tend to have a smaller stock price crash risk and are less likely to engage in opportunistic behaviors than those in low-trust regions. Moreover, the positive role of trust in increasing firm-specific return variations and discouraging corporate misbehaviors is more pronounced for SOEs than Non-SOEs. Evidence from 2SLS regressions supports a causal impact of social trust on stock price synchronicity.

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Notes

  1. Li et al. (2017) have a more-focused examination on the topic and documents similar findings.

  2. The Rule of Law Index reflects the perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.

  3. This survey was conducted by the Chinese Enterprise Survey System for the purpose of collecting information on the provincial trustworthiness of companies. Managers were asked to answer the following question: “According to your experience, which five provinces have the most trustworthy enterprises?” The trust score for each province is calculated as the weighted average of the ordered rankings.

  4. The survey is jointly conducted by the HKUST’s Survey Research Center and the Sociology Department of Renmin University of China. It is a national survey covering 125 counties from 28 provinces and 5,894 valid responses were collected. We focus on the response to the question “Generally speaking, do you trust strangers around you?” to construct the trust index. Specifically, the respondent can choose one of the five ordered answers, ranging from “do not trust greatly” (1), “do not trust” (2), “neutral” (3), “trust” (4), to “trust greatly” (5). We take the average scores at the province level as our second measure of regional trust.

  5. We thank the anonymous referee for suggesting this test.

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Funding

This work was supported by the National Natural Science Foundation of China [No. 71702102,71472041].

Author information

Authors and Affiliations

  1. Postdoctoral Station of Business Administration, Shanghai University of Finance and Economics, Shanghai, China

    Baoyin Qiu

  2. China Institute for Urban Governance\School of International and Public Affairs, Shanghai Jiao Tong University, Shanghai, China

    Junli Yu

  3. Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai, China

    Kuo Zhang

Authors
  1. Baoyin Qiu
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  2. Junli Yu
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  3. Kuo Zhang
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Corresponding author

Correspondence to Junli Yu.

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Appendix: Variable Definitions

Appendix: Variable Definitions

Variable

Definitions

Dependent variables

 Sync

Logarithmic transformation of R2 for the market model in Eq. (1), computed as Log (R2/1 − R2)

 Beta

The annual beta coefficient of firm’s stocks estimated using the market model

 Ncskew

The negative coefficient of skewness, calculated by taking the negative of the third moment of firm-specific weekly returns for each sample year and dividing it by the standard deviation of firm-specific weekly returns raised to the third power

 Duvol

The down-to-up volatility

 Violation

Dummy variable: 1 if the firm has any violation during the year, and 0 otherwise

Trust measures

 Trust1

Province-level enterprise trustworthiness index, calculated from a survey conducted by the “Chinese Enterprise Survey System” in 2001 that measures the trustworthiness of enterprises in China, where a higher index value suggests a more trustworthy enterprise business community in the province

 Trust2

Province-level trust index, calculated from a survey conducted by the “China General Social Survey” in 2003 that measures the degree to which residents trust strangers

 Blood2000

The milliliters of blood donation in a province scaled by the population in 2000

 Blood2011

The milliliters of blood donation in a province scaled by the population in 2011

 NGO

The number of non-government organizations in a province per million of population, averaged for the years 2005–2008

Control variables

 Size

Natural logarithm of firm’s total assets

 Lev

Total liabilities scaled by firm’s total assets

 ROA

Net profits scaled by firm’s total assets

 Growth

Total asset growth rate

 Turnover

Asset turnover ratio calculated as total sales over firm’s total assets

 Risk

(Net income + tax expenses + finance charge)/(Net income + tax expenses)

 Outdir

Number of independent directors scaled by total number of directors on the board

 Committees

Number of committees on the board

 HHI

Industry-level Herfindahl index

 GDP

Gross Domestic Product Index

 Uncertainty

Economic policy uncertainty index

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Qiu, B., Yu, J. & Zhang, K. Trust and Stock Price Synchronicity: Evidence from China. J Bus Ethics 167, 97–109 (2020). https://doi.org/10.1007/s10551-019-04156-1

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