Abstract

This letter investigates the association between social trust and corporate social responsibility. Using a sample comprising firms operating in 32 countries during the period from 2004 to 2019, we provide evidence highlighting social trust as a factor that can explain cross-country variations in corporate social responsibility activities. Our results extend the research examining the determinants of CSR by showing that informal institutions such as trust play a crucial role in shaping corporate CSR practices. Our findings are robust to controlling for a set of firm-level and country-level control variables, to employing alternative econometric methodologies, and to using various CSR proxies.

Introduction

Social Trust refers to the degree to which individuals in a society believe that others will act in a reliable, honest, and cooperative manner, based on commonly shared norms and values. It involves the expectation that others will not exploit vulnerabilities or engage in behavior that is harmful to the common good (Bradach and Eccles, 1989). Sapienza and Zingales (2012, p. 124) consider trust as “the expectation that another person (or institution) will perform actions that are beneficial, or at least not detrimental, to us regardless of our capacity to monitor those actions…so that we will consider cooperating with him [the institution]”. Aggregated up to the country-level, trust constitutes an important dimension of a country’s political culture. Prior research has demonstrated the importance of trust from a macroeconomic perspective including, higher economic growth (Putnam, 1993; Fukuyama, 1995; La Porta et al., 1997), increased capital market participation (Guisoet al., 2008), and more bilateral foreign direct investments (Bottazzi et al., 2016). At the firm level, Pevzner et al. (2015) state that investors in high-trust countries assign a lower probability to the likelihood that managers will behave in an opportunistic way. Consistently, a growing amount of research documents that trust mitigates agency and information asymmetry problems, leading to better corporate decisions related to investments (Fonseka et al., 2021; Knetsch and Salzmann, 2022), financing (Wu et al., 2014), financial reporting (Pevzner et al., 2015), and tax planning (Xia et al., 2017), among other.

Conclusion

This study examines the association between social trust and firms’ CSR performance. Our primary intuition is that social trust, as an important cultural dimension, could affect a firm’s decision to engage in socially responsible activities. Using a large sample of firms from 32 countries spanning the 2004–۲۰۱۹ period, we find a positive and significant relationship between TRUST and CSR, suggesting that social trust encourages firms to improve their CSR practices and performance. Our results reflect the importance of a trustworthiness relationship between firms and their stakeholders and how it could affect the investment decision. For policymakers, our findings indicate that strengthening an environment with a high level of trust and promoting the culture of trustworthiness among a country or a company may lead to higher engagement in CSR practices.