Hostname: page-component-78c5997874-94fs2 Total loading time: 0 Render date: 2024-11-15T20:19:04.923Z Has data issue: false hasContentIssue false
  • English
  • Français

Social Capital, Trusting, and Trustworthiness: Evidence from Peer-to-Peer Lending

Published online by Cambridge University Press:  12 April 2021

Iftekhar Hasan Open the ORCID record for Iftekhar Hasan [Opens in a new window] ,
Qing He  and
Haitian Lu
Iftekhar Hasan
Affiliation:
Fordham University Gabelli School of Businessihasan@fordham.edu
Qing He*
Affiliation:
Renmin University of China School of Finance and China Financial Policy Research Center
Haitian Lu
Affiliation:
Hong Kong Polytechnic University Faculty of Businesshaitian.lu@polyu.edu.hk
*
qinghe@ruc.edu.cn (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

How does social capital affect trust? Evidence from a Chinese peer-to-peer lending platform shows that regional social capital affects the trustee’s trustworthiness and the trustor’s trust propensity. Ceteris paribus, borrowers from regions with higher social capital receive larger bids from individual lenders and have higher funding success, larger loan sizes, and lower default rates, especially for low-quality borrowers. Lenders from regions with higher social capital take higher risks and have higher default rates, especially for inexperienced lenders. Cross-regional transactions are most (least) likely to be realized between parties from regions with high (low) social capital.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 4 , June 2022 , pp. 1409 - 1453
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We appreciate helpful comments from James Ang (the referee) and Jarrad Harford (the editor). We are grateful for helpful comments from colleagues at our respective institutions. He gratefully acknowledges the funding support from the National Social Science Foundation of China (19AJY028, 20ZDA053). Lu gratefully acknowledges the funding support from the Hong Kong government (RGC/GRF Project 15605715) and HK Interactive Lab Limited. We also thank Xiaoyang Li and Jishuang Yu for excellent research assistance. The authors remain responsible for all errors and omissions.

References

Ahern, K.; Daminelli, D.; and Fracassi, C.. “Lost in Translation? The Effect of Cultural Values on Mergers around the World.” Journal of Financial Economics, 117 (2015), 165–189.CrossRefGoogle Scholar
Ahlerup, P., and Olsson, O.. “The Roots of Ethnic Diversity.” Journal of Economic Growth, 17 (2012), 71–102.CrossRefGoogle Scholar
Akerlof, G. “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism.” Quarterly Journal of Economics, 84 (1970), 488–500.CrossRefGoogle Scholar
Alesina, A.; Devleeschauwer, A.; Easterly, W.; Kurlat, S.; and Wacziarg, R.. “Fractionalization.” Journal of Economic Growth, 8 (2003), 155–194.CrossRefGoogle Scholar
Alesina, A., and La Ferrara, E.. “Ethnic Diversity and Economic Performance.” Journal of Economic Literature, 153 (2005), 762–800.CrossRefGoogle Scholar
Algan, Y., and Cahuc, P.. “Trust, Growth, and Well-Being: New Evidence and Policy Implications.” In Handbook of Economic Growth, Aghion, P. and Durlauf, S., eds. Amsterdam, Netherlands: North-Holland (Elsevier) (2014).Google Scholar
Allen, F.; Qian, J.; and Qian, M.. “Law, Finance, and Economic Growth in China.” Journal of Financial Economics, 77 (2005), 57–116.CrossRefGoogle Scholar
Anderson, L. R.; Mellor, J. M.; and Milyo, J.. “Social Capital and Contributions in a Public-Goods Experiment.” American Economic Review, 94 (2004), 373–376.CrossRefGoogle Scholar
Ang, J.; Cheng, Y.; and Wu, C.. “Trust, Investment, and Business Contracting.” Journal of Financial and Quantitative Analysis, 50 (2015), 569–595.CrossRefGoogle Scholar
Arrow, K. “Information and Economic Behavior.” Stockholm, Federation of Swedish Industries. 28. Reprint of Nobel Prize Paper (1973).CrossRefGoogle Scholar
Behrman, J.; Mitchell, O.; Soo, C.; and Bravo, D.. “How Financial Literacy Affects Household Wealth Accumulation.” American Economic Review, 102 (2012), 300–304.CrossRefGoogle ScholarPubMed
Bloch, F.; Genicot, G.; and Ray, D.. “Reciprocity in Groups and the Limits to Social Capital.” American Economic Review, 97 (2007), 65–69.CrossRefGoogle Scholar
Bordalo, P.; Coffman, K.; Gennaioli, N.; and Shleifer, A.. “Stereotypes.” Quarterly Journal of Economics, 131 (2016), 1753–1794.CrossRefGoogle Scholar
Bottazzi, L.; Da Rin, M.; and Hellmann, T.. “The Importance of Trust for Investment: Evidence from Venture Capital.” Review of Financial Studies, 29 (2016), 2283–2318.CrossRefGoogle Scholar
Bourdieu, P. “The Forms of Capital.” In Handbook of Theory and Research for the Sociology of Education, Richardson, J. G., ed. New York, NY: Greenwood Press (1985).Google Scholar
Boyreau-Debray, G., and Wei, S. J.. “Pitfalls of a State-Dominated Financial System: The Case of China.” NBER Working Paper No. 11214 (2005).CrossRefGoogle Scholar
Burns, P.; Myers, A.; and Bailey, A.. “Cultural Stereotypes and Barriers to the Single Market.” Working Paper, Cranfield European Enterprise Centre, Cranfield School of Management (1993).Google Scholar
Chan, K.; Covrig, V.; and Ng, L.. “What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide.” Journal of Finance, 60 (2005), 1495–1534.CrossRefGoogle Scholar
Coleman, J. “Social Capital in the Creation of Human Capital.” American Journal of Sociology, 94 (1988), 95–120.CrossRefGoogle Scholar
Collier, P., and Gunning, J. W.. “Explaining African Economic Performance.” Journal of Economic Literature, 37 (1999), 64–111.CrossRefGoogle Scholar
Colquitt, J. A.; Scott, B. A.; and LePine, J. A.. “Trust, Trustworthiness, and Trust Propensity: A Meta-Analytic Test of Their Unique Relationships with Risk Taking and Job Performance.” Journal of Applied Psychology, 92 (2007), 909–927.CrossRefGoogle ScholarPubMed
Coval, J., and Moskowitz, T.. “Home Bias at Home: Local Equity Preference in Domestic Portfolios.” Journal of Finance, 54 (1999), 2045–2073.CrossRefGoogle Scholar
Di Falco, S., and Chavas, J. P.. “Rainfall Shocks, Resilience and the Effects of Crop Biodiversity on Agroecosystem Productivity.” Land Economics, 84 (2008), 83–96.CrossRefGoogle Scholar
Duarte, J.; Siegel, S.; and Young, L.. “Trust and Credit: The Role of Appearance in Peer-to-Peer Lending.” Review of Financial Studies, 25 (2012), 2455–2484.CrossRefGoogle Scholar
Durlauf, S., and Fafchamps, M.. “Social Capital.” In Handbook of Economic Growth, Aghion, P. and Durlauf, S., eds. Amsterdam, Netherlands: Elsevier (2006).Google Scholar
Easterly, W., and Levine, R.. “Africa’s Growth Tragedy: Policies and Ethnic Divisions.” Quarterly Journal of Economics, 112 (1997), 1203–1250.CrossRefGoogle Scholar
El-Attar, M., and Poschke, M.. “Trust and the Choice Between Housing and Financial Assets: Evidence from Spanish Households.” Review of Finance, 15 (2011), 727–756.CrossRefGoogle Scholar
Elliott, D.; Kroeber, A.; and Yu, Q.. “Shadow Banking in China: A Primer.” Working Paper, Brookings Institution (2015).Google Scholar
Elster, J. “Social Norms and Economic Theory.” Journal of Economic Perspectives, 3 (1989), 99–117.CrossRefGoogle Scholar
Ernst & Young. “Fintech Adoption Index 2017.” Available at http://www.ey.com/Publication/vwLUAssets/ey-fintech-adoption-index-2017/$FILE/ey-fintech-adoption-index-2017.pdf (2017).Google Scholar
Fei, X. T. “The Formation and Development of the Chinese Nation with Multi-Ethnic Groups.” International Journal of Anthropology and Ethnology (2017), Article 1. Available at https://doi.org/10.1186/s41257-017-0001-z.CrossRefGoogle Scholar
Fukuyama, F. Trust: The Social Virtues and the Creation of Prosperity. New York, NY: Free Press (1995).Google Scholar
Giannetti, M., and Yafeh, Y.. “Do Cultural Differences Between Contracting Parties Matter? Evidence from Syndicated Bank Loans.” Management Science, 58 (2012), 365–383.CrossRefGoogle Scholar
Gilbert, D., and Hixon, J.. “The Trouble of Thinking: Activation and Application of Stereotypic Beliefs.” Journal of Personality and Social Psychology, 60 (1991), 509–517.CrossRefGoogle Scholar
Glaeser, E. L.; Laibson, D. I.; Scheinkman, J. A.; and Soutter, C. L.. “Measuring Trust.” Quarterly Journal of Economics, 115 (2000), 811–846.CrossRefGoogle Scholar
Granovetter, M. “Economic Action and Social Structure: The Problem of Embeddedness.” American Journal of Sociology, 91 (1985), 481–510.CrossRefGoogle Scholar
Grinblatt, M., and Keloharju, M.. “What Makes Investors Trade?” Journal of Finance, 56 (2001), 589–616.CrossRefGoogle Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “The Role of Social Capital in Financial Development.” American Economic Review, 94 (2004), 526–556.CrossRefGoogle Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “Trusting the Stock Market.” Journal of Finance, 63 (2008), 2557–2600.CrossRefGoogle Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “Cultural Biases in Economic Exchange?” Quarterly Journal of Economics, 124 (2009), 1095–1131.CrossRefGoogle Scholar
Gupta, A.; Raman, K.; and Shang, C. G.. “Social Capital and the Cost of Equity.” Journal of Banking and Finance, 87 (2018), 102–117.CrossRefGoogle Scholar
Guriev, S., and Melnikov, N.. “War, Inflation, and Social Capital.” American Economic Review, 106 (2016), 230–235.CrossRefGoogle Scholar
Hasan, I.; Hoi, C. K.; Wu, Q.; and Zhang, H.. “Social Capital and Debt Contracting: Evidence from Bank Loans and Public Bonds.” Journal of Financial and Quantitative Analysis, 52 (2017a), 1017–1047.CrossRefGoogle Scholar
Hasan, I.; Hoi, C. K.; Wu, Q.; and Zhang, H., “Does Social Capital Matter in Corporate Decisions? Evidence from Corporate Tax Avoidance.” Journal of Accounting Research, 55 (2017b), 629–668.CrossRefGoogle Scholar
He, Q.; Xue, C.; and Zhu, C.. “Financial Development and Patterns of Industrial Specialization: Evidence from China.” Review of Finance, 21 (2017), 1593–1638.CrossRefGoogle Scholar
Herzenstein, M.; Sonenshein, S.; and Dholakia, U. M.. “Tell Me a Good Story and I May Lend You Money: The Role of Narratives in Peer-to-Peer Lending Decisions.” Journal of Marketing Research, 48 (2011), 138–149.CrossRefGoogle Scholar
Hoi, C. K. S.; Wu, Q.; and Zhang, H.. “Does Social Capital Mitigate Agency Problems? Evidence from Chief Executive Officer (CEO) Compensation.” Journal of Financial Economics, 133 (2019), 498–519.CrossRefGoogle Scholar
Hong, H.; Kubik, J. D.; and Stein, J. C.. “Social Interaction and Stock Market Participation.” Journal of Finance, 59 (2005), 137–63.CrossRefGoogle Scholar
Huang, K., and Shang, C. G.. “Leverage, Debt Maturity, and Social Capital.” Journal of Corporate Finance, 54 (2019), 26–46.CrossRefGoogle Scholar
Kahneman, D., and Tversky, A.. “Subjective Probability: A Judgment of Representativeness.” Cognitive Psychology, 3 (1972), 430–454.CrossRefGoogle Scholar
Klasen, S.; Priebe, J.; and Rudolf, R.. “Cash Crop Choice and Income Dynamics in Rural Areas: Evidence for Post-Crisis Indonesia.” Agricultural Economics, 44 (2013), 349–364.CrossRefGoogle Scholar
Knack, S., and Keefer, P.. “Does Social Capital Have an Economic Payoff? A Cross-Country Investigation.” Quarterly Journal of Economics, 112 (1997),1251–1288.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R.. “Law and Finance.” Journal of Political Economy, 106 (1998), 1113–1155.CrossRefGoogle Scholar
Larrimore, L.; Jiang, L.; Larrimore, J.; Markowitz, D.; and Gorski, S.. “Peer-to-Peer Lending: The Relationship Between Language Features, Trustworthiness, and Persuasion Success.” Journal of Applied Communication Research, 39 (2011), 19–37.CrossRefGoogle Scholar
Lin, M.; Prabhala, N.; and Viswanathan, S.. “Judging Borrowers by the Company They Keep: Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending.” Management Science, 59 (2013), 17–35.CrossRefGoogle Scholar
Lin, T., and Pursiainen, V.. “Fund What You Trust? Social Capital in Crowdfunding.” Working Paper, available at https://ssrn.com/abstract=3088905 (2018).CrossRefGoogle Scholar
Lusardi, A., and Mitchell, O.. “Planning and Financial Literacy. How Do Women Fare?” American Economic Review, 98 (2008), 413–417.CrossRefGoogle Scholar
Michels, J. “Do Unverifiable Disclosures Matter? Evidence from Peer-to-Peer Lending.” Accounting Review, 87 (2012), 1385–1413.CrossRefGoogle Scholar
Morduch, J. “Income Smoothing and Consumption Smoothing.” Journal of Economic Perspectives, 9 (1995), 103–114.CrossRefGoogle Scholar
Ongena, S., and Smith, D.. “What Determines the Number of Bank Relationships? Cross-Country Evidence.” Journal of Financial Intermediation, 9 (2000), 26–56.CrossRefGoogle Scholar
Petersen, M., and Rajan, R.. “Does Distance Still Matter? The Information Revolution in Small Business Lending.” Journal of Finance, 57 (2002), 2533–2570.CrossRefGoogle Scholar
Posner, E. “Law and Social Norms: The Case of Tax Compliance.” Virginia Law Review, 86 (2000), 1781–1819.CrossRefGoogle Scholar
Putnam, R. Making Democracy Work: Civic Traditions in Modern Italy. Princeton, NJ: Princeton University Press (1993).Google Scholar
Putnam, R. “Bowling Alone: America’s Declining Social Capital.” Journal of Democracy, 6 (1995), 65–78.CrossRefGoogle Scholar
Qian, J., and Strahan, P.. “How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans.” Journal of Finance, 62 (2007), 2803–2834.CrossRefGoogle Scholar
Rajan, R., and Zingales, L.. “Financial Dependence and Growth.” American Economic Review, 88 (1998), 559–586.Google Scholar
Stiglitz, J., and Weiss, A.. “Credit Rationing in Markets with Imperfect Information.” American Economic Review, 71 (1981), 393–410.Google Scholar
Stock, J., and Yogo, M.. “Testing for Weak Instruments in Linear IV Regression.” In Identification and Inference for Econometric Models: Essays in Honor of Thomas Rothenberg. New York, NY: Cambridge University Press (2005).Google Scholar
Talhelm, T.; Zhang, X.; Oishi, S.; Shimin, C.; Duan, D.; Lan, X.; and Kitayama, S.. “Large-Scale Psychological Differences Within China Explained by Rice Versus Wheat Agriculture.” Science, 344 (2014), 603–608.CrossRefGoogle ScholarPubMed
Thakor, R. T., and Merton, R.. “Trust in Lending.” NBER Working Paper No. 24778. Available at https://www.nber.org/papers/w24778 (2018).CrossRefGoogle Scholar
The Economist . “In Fintech, China Shows the Way: Advanced Technology, Backward Banks and Soaring Wealth Make China a Leader in Fintech.” Available at http://www.economist.com/news/finance-and-economics/21717393-advanced-technology-backward-banks-and-soaring-wealth-make-china-leader (2017).Google Scholar
Uhlaner, C. “Rational Turnout: The Neglected Role of Groups.” American Journal of Political Science, 33 (1989), 390–422.CrossRefGoogle Scholar
Wei, Z., and Lin, M.. “Market Mechanisms in Online Peer-to-Peer Lending.” Management Science, 63 (2016), 4236–4257.CrossRefGoogle Scholar
Woolcock, M. “Social Capital and Economic Development: Toward a Theoretical Synthesis and Policy Framework.” Theory and Society, 27 (1998), 151–208.CrossRefGoogle Scholar
Wu, W.; Firth, M.; and Rui, O. M.. “Trust and the Provision of Trade Credit.” Journal of Banking and Finance, 39 (2014), 146–159.CrossRefGoogle Scholar
Yamagishi, T. “The Provision of a Sanctioning System in the United States and Japan.” Social Psychology Quarterly, 51 (1988), 265–271.CrossRefGoogle Scholar
Zhang, W., and Ke, R.. “Trust in China: A Cross-Regional Analysis.” Working Paper, William Davidson Institute. Available at https://ssrn.com/abstract=577781 (2003).CrossRefGoogle Scholar
Zingales, L. “The ‘Cultural Revolution’ in Finance.” Journal of Financial Economics, 117 (2015), 1–4.CrossRefGoogle Scholar