When firms talk, do investors listen? The role of trust in stock market reactions to corporate earnings announcements

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)190-223
Journal / PublicationJournal of Financial Economics
Issue number1
Online published17 Aug 2013
Publication statusPublished - Jul 2015


We examine whether the level of trust in a country affects investors' perception and utilization of information transmitted by firms through financial disclosure. Specifically, we investigate the effect of societal trust on investor reactions to corporate earnings announcements. We test two competing hypotheses. On the one hand, corporate earnings announcements are perceived as more credible by investors in more trusting societies and, therefore, elicit stronger investor reactions. On the other hand, societal trust mitigates outside investors' concern of moral hazard and reduces the value of corporate earnings announcements to them, thereby weakening their reactions to these events. We analyze the abnormal trading volume and abnormal stock return variance during the earnings announcement period in a large sample of firm-year observations across 25 countries, and we find that both measures of investor reactions to earnings announcements are significantly higher in more trusting countries. We also find that the positive effect of societal trust on investor reactions to earnings news is more pronounced when a country's investor protection and disclosure requirements are weaker, suggesting that trust acts as a substitute for formal institutions; when a country's average education level is lower, consistent with less educated people relying more on trust in making economic decisions; and when firm-level information asymmetry is higher, supporting the notion that trust plays a more important role in poorer information environments.

Research Area(s)

  • Corporate earnings announcement, Culture, Investor reaction, Trust

Bibliographic Note

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