Trust and innovation: Evidence from CEOs' early-life experience
47 Pages Posted: 23 May 2021 Last revised: 25 Aug 2021
Date Written: May 18, 2021
Using CEOs’ early-life experience during China’s Cultural Revolution (1966–1976) to distinguish the trust level of CEOs, we employ a difference-in-differences identification strategy to show that the CEO’s trust level exhibits significantly positive impacts on corporate innovation. We then use an alternative dataset from the survey of the Chinese Enterprise Survey System in 2000 to measure the trust at the firm level and subsequently achieve highly consistent findings. We further demonstrate that the substitution effect between informal and formal institutions also exists in relation to the impact of trust on innovation. Trust plays a more important role in promoting innovation when formal institutions are lacking. Overall, this study enriches our understanding on the effects of the CEO’s trust level on corporate innovation and provides a micro-level evaluation of China’s Cultural Revolution in the long run.
Keywords: informal institutions, CEO’s trust level, corporate innovation, social trust
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