The effect of social trust on firms’ supply chain stability: Evidence from China

Using Chinese listed firms from 2010 to 2021 as the sample to examine the impact of social trust on global customer stability and supplier stability, we find that firms located in regions with a higher level of social trust tend to have greater customer stability, both overall customer stability and primary customer stability measured by the top five customers. However, when discussing supplier stability, our finding reveals that an increase in social trust in a firm’s location significantly promotes the primary supplier stability (the top five), but has no significant effect on the overall supplier stability. After using instrumental variable method to address potential endogeneity and conducting a series of robustness checks, the results confirm the robustness of our findings. Further analyses indicate that the underlying mechanisms driving customer stability are through alleviating financing constraints and promoting innovation, while the mechanisms through which social trust improves top five supplier stability are reduced earnings management and increased trade credit received. Finally, heterogeneity analysis indicates that the effects of formal institutional quality and social trust on supply chain stability exhibit a substitutive relationship.