Social trust and internal control extensiveness: Evidence from China

We examine whether social trust in the province headquartered by the firm matters to its internal control extensiveness. Using a sample of Chinese firms, we find that social trust is negatively associated with implementing internal control extensiveness. Additional analyses indicate that the negative relationship is more salient for firms in high marketization provinces and state-owned firms. Moreover, we reveal that firms located in an environment with high social trust refrain from earnings manipulation and financial violations, thereby inducing a lower desire for internal control extensiveness. Our baseline findings remain qualitatively the same after conducting various robustness checks, suggesting that social trust can be deemed as external corporate governance to substitute internal control extensiveness.