Social Trust and the Disclosure of Letters to Shareholders

Abstract

The literature on voluntary disclosure primarily focuses on management forecasts. However, the determinants of narrative voluntary disclosures, such as letters to shareholders, have garnered limited scholarly attention. This paper examines the impact of social trust on firms’ decisions to issue letters to shareholders. We find that firms in regions with higher social trust are more inclined to issue such letters. This effect is more pronounced for firms exhibiting weaker institutional environments, less influence from Confucianism and lower firm-level credibility. Furthermore, we identify the mechanism through which social trust facilitates the issuance of letters to shareholders: curbing corporate misconduct. Lastly, we present evidence indicating a favourable market reaction to the issuance of letters to shareholders. Overall, our findings suggest that social trust enhances the credibility of information, thereby encouraging greater voluntary narrative disclosures. This study contributes to prior work on the determinants of voluntary disclosures and the influence of social trust. Additionally, this research enhances our understanding of disclosure practices related to letters to shareholders and offers some insights for regulators on how to improve disclosure practices by strengthening informal institutions.