Does social trust restrain excess perk consumption? Evidence from China

Abstract We examine the association between social trust and executives' excess perk consumption. Prior studies suggest that excess perks are the result of agency problem that managers benefit themselves at the expense of shareholders. We hypothesize that social trust can discipline managers' opportunistic behavior and facilitate investors' monitoring, and therefore, constrain the level of excess perks. Using a sample of Chinese listed firms, we find that social trust is negatively associated with management's excess perks, consistent with our prediction. Our main finding is robust to the instrumental variable approach that mitigates the potential endogeneity concerns. To explore the potential mechanisms through which social trust affects excess perks, we first show that both the social trust status of firms' locations and the social trust status of CEOs' hometowns can affect excess perks. Additional cross-sectional analyses reveal that the negative association between social trust and excess perks is more pronounced in firms with poorer corporate governance and firms with political connections. Finally, we find some evidence that firms located in the high social trust areas use more cash compensation and options granting to keep motivating their managers. This study provides an informal institutional perspective for both policy makers and shareholders to take social trust into account to enhance corporate governance.