Impact of investor trust on public firms' stock price efficiency and cost of capital: Insights from a firm-level measure for investor trust

Although studies have suggested that investor trust positively influences stock price efficiency and subsequently reduces the cost of capital for public firms, few studies have employed a direct firm-level measure of investor trust to offer empirical support for this proposition. Because stock prices are more efficient surrounding earnings announcements, we construct this measure by examining how prices change when unexpected earnings reports are provided. Using US market data from 1990 to 2019 to determine how strongly investor trust affects public firms' stock price efficiency and cost of capital, we find that stock prices of firms with higher investor trust reflect market news more efficiently and predict earnings more accurately. Furthermore, our results suggest that companies trusted more by investors can raise money more cheaply. Collectively, our findings underscore the importance of fostering investor trust as a means of enhancing stock price efficiency and reducing the cost of capital.