Social Trust, External Monitoring and Stock Price Crash Risk: Testing Complementary and Substitution Theory

Abstract

Social trust is considered as a socio-economic factor that influences organizational or individual behaviors. As such, CEOs with high social trust behave more honestly and are less likely to hide bad news, which lead to reducing corporate stock price crash risk. Given this argument, the present study is concerned with examining the association between social trust and stock price crash risk as well as exploring the moderating effect of external monitoring on this relation. To do so, negative skewness of stock return and down-to-up volatility are used to measure stock price crash risk, institutional investor's ownership percentage is used as a proxy for external monitoring, whereas Saffarinia and Sharif’s (2010) questionnaire is employed to measure social trust. Using multivariate regression model, the findings of the research indicate that social trust mitigates corporate stock price risk. Regarding the predictions of substitution theory, moreover, external monitoring weakens the negative association between social trust and corporate stock crash risk.

Keywords

• Complementary Theory
• External Monitoring
• Social Trust
• Stock price crash risk
• Substitution Theory