Are entrepreneurial and managerial trust and banks' risk-taking behavior related? Empirical evidence from China

This study examines the relationship between entrepreneurial and managerial trust (EMT) on banks' risk-taking behavior in China. We provide evidence that the effect of EMT on bank risk-taking is a curvilinear (U-shaped) relationship. As EMT increases, bank risk-taking decreases before rising at the bank headquarters level, which permeates to the branch level. Moderating obseeffects analyses of bank characteristics indicate that the curvilinear relationship is stronger for state-owned, large, less efficient, and high non-interest income banks. Furthermore, moderating effects analyses of institutional characteristics show that the curvilinear relationship is stronger for banks in provinces with high institutional efficiency, government and market regulation, and law enforcement levels. However, we find that the introduction of a deposit insurance policy in China does not change the relationship between EMT and bank risk-taking behavior. Overall, our result of a curvilinear relationship helps answer the empirical puzzle about the contrasting positive and negative influences of trust on banks' risk-taking behavior found in prior research.