Does social trust restrict dual agency costs? Evidence from China

This study examines whether social trust mitigates both principal-agent and principal-principal agency costs. Using data from China, we find that those firms headquartered in regions with high levels of social trust have a lower level of perk consumption, a high asset turnover ratio, and a low level of financial tunneling. Thus, the findings provide strong evidence that social trust serves as an invisible hand mitigating agency costs. Additionally, the results demonstrate that social trust’s effect is attenuated when external monitoring is already in place, suggestive of a more pronounced monitoring effect of social trust when firms lack formal governance mechanisms. Additional analyses on State-Owned Enterprise (SOE) and non-SOE subsamples reveal that social trust has a more pronounced effect in reducing managerial perk consumption in SOEs than in non-SOEs, whereas the constraining effect of social trust on tunneling is stronger in non-SOEs than it in SOEs.