Social trust and the choice between bank debt and public debt: Evidence from international data

Motivated by existing research on the informational and monitoring role of social trust, we examine how social trust affects firms' choice between bank debt and public debt. Using firm -level data from 33 countries, we document that higher social trust is associated positively (negatively) with the long-term public (bank) debt ratio. The findings are robust when we control for other important country-level and firm-level factors. There are two possible channels of this association. We find that social trust affects debt structure through monitoring and borrowers' incentive channels. To address potential endogeneity, we use instrumental variables, propensity score and entropy balancing matching, and large change analyses and document that our findings are robust. Examining the effect of debt structure on firm performance, we find that Tobin's Q associates positively with long-term public debt ratios in high-trust countries.

Automated summary

This study explores the impact of social trust on the choice between bank debt and public debt for firms. The findings indicate that higher levels of social trust are associated with a higher ratio of long-term public debt and a lower ratio of bank debt for firms. This relationship holds even after controlling for other factors at the country and firm level.