The Performance Effect of Inter-Firm Trust in Corrupt Environments: A Signaling Theory Perspective

Inter-firm trust has been used as a main relational governance mechanism to signal unobservable qualities to reduce information asymmetry and lower transaction cost in the supply chain. This paper steps further by investigating the impact of two types of trust (credibility trust and benevolence trust) on firms’ operational and relational performance. It adopts the signaling theory perspective to explain the moderating effect of political corruption on the trust-performance relationship since corruption may influence the signal strength of trust and interfere the signal receiver’s interpretation. Our empirical results indicate that both credibility trust and benevolence trust are positively related to firm performance. Our findings also suggest that in highly corrupt environments, the positive signaling role of benevolence trust in operational performance will be weakened in that the strength and effectiveness of the subjective signal of benevolence trust is distorted by corruption. In contrast, the positive effect of credibility trust on relational performance will be strengthened in more corrupt environments because corruption influences the signal receiver’s interpretation of the signal of credibility trust.