The Relation between Trust and Accounting Quality

Using a sample of 43 countries, we examine the association between societal trust and firms‟ voluntary and regulated financial reporting and disclosure quality. We explore two competing predictions. On one hand, societal trust and voluntary reporting quality are predicted to have a negative association if greater trust lowers stakeholders‟ demand for information. Similarly, a predicted negative association would arise for regulated reporting requirements if greater trust lowers stakeholders‟ demand for regulation. On the other hand, societal trust and reporting quality are predicted to have a positive association if stakeholders perceive firms‟ disclosures as more credible in high trust environments thereby increasing stakeholders‟ demand for information. We document a robust positive empirical relation between societal trust and measures of voluntary accounting quality, but find no association between societal trust and regulated reporting requirements. JEL classification: G34; G38; M41