Does Social Capital Enhance Stock Liquidity? An Investigation of the Resilience of the Trading Environment During a Crisis of Trust

Abstract

We investigate whether social capital and trust provide a form of liquidity/trading resilience, more specifically, whether social capital and trust played a role in the speed of stock recovery following activation of the market-wide circuit breaker (MWCB) that occurred at the beginning of the COVID-19 pandemic in March 2020. Our finding that high-social capital firms rebounded more swiftly in terms of stock liquidity and quality of the stock trading environment provides new evidence that social capital and trust can safeguard firms’ stocks against a potential liquidity drain and rapid deterioration in the stock trading environment under extreme market conditions.