Does societal trust matter for the conservative financing policy puzzle? European SMEs evidence

Purpose This paper studies the impact of societal trust on the conservative financing policy puzzle, aiming to cover a gap in the relationship between cultural values and the conservative financing policy. Design/methodology/approach We use a sample of 14,509 privately held medium-sized manufacturing firms from 26 European countries between 2015 and 2020 and rely on logistic regression methods controlling for firm-specific and macroeconomic factors. Findings We show that societal trust decreases the odds of being a zero-leverage or almost zero-leverage firm. Also, the probability of being a conservatively financed firm increases for older and more profitable firms and decreases with tangibility. In more trustworthy national environments, firms are less averse to debt as a source of financing. Our results are robust to the specific measure of trust, estimation methods, sampling procedures, and annual financial constraint status. Moreover, we show that the effect is noticed both in the long-term debt and the short-term debt with a lower economic impact in the latter situation and that increased societal trust attenuates (reinforces) the effect of being a financially constrained (unconstrained) firm on the odds of adopting a conservative financing policy. Research limitations/implications Societal trust strategically impacts debt financing policy and could help foster firms’ growth, particularly for those facing heavier financial constraints. Originality/value Novel evidence on the impact of societal trust on the conservative financing policy, for privately held medium-sized European firms.