This study aims to examine how informal institutions, particularly social trust, shape firms’ corporate social engagements (CSE) across countries, and how this relationship is moderated by the strength of formal institutions.
The authors use OLS regressions with firm-, year- and industry-fixed effects as our baseline empirical specification. To address potential endogeneity concerns, they complement the baseline analysis with instrumental-variable (2SLS) estimations that exploit exogenous variation in social trust driven by historical and cultural factors that predate contemporary corporate behavior. The final sample comprises 21,563 firm-year observations across 20 countries. Firm-level financial and ESG data are obtained from the Refinitiv Eikon (formerly Thomson Reuters Eikon) database. Social trust is measured using panel data from the World Values Survey, which provides cross-country, time-series data on generalized trust across societies.
Higher levels of societal trust significantly reduce firms’ participation in CSE activities. Moreover, the moderating analysis shows that trust and formal institutions interact to shape CSE, with trust exerting a stronger influence in institutional environments with more developed legal protections. These results highlight the dual roles of informal and formal institutions in corporate strategy, both as substitutes and complements. The findings imply that trust is particularly effective in substituting for weak or moderately developed institutions, but once institutional quality is very strong, trust’s marginal role fades.
By focusing on social trust as a key determinant of CSE across countries, this study extends the literature on the institutional foundations of corporate behavior. To the best of the authors’ knowledge, it is among the first to demonstrate that trust − an informal institution − can reduce the strategic necessity of CSE by reinforcing implicit contracting, thereby complementing or substituting formal governance mechanisms depending on institutional strength. Existing studies have mainly overlooked this view and have primarily focused on firm-specific drivers (e.g. governance, profitability, stakeholder pressure) and formal regulatory environments.
