Trust and contracting with foreign banks: Evidence from China

Desheng Yin, Iftekhar Hasan, Liuling Liu and Haizhi Wang

Journal of Asian Economics, 2022, vol. 83, issue C

Abstract: We empirically investigate whether firms doing business in regions characterized as having high social trust receive preferential treatment on loan contractual terms by foreign banks. Tracing cross-border syndicated lending activities in China, we document that firms located in provinces with higher social trust scores obtain significantly low costs of bank loans and experience less stringent collateral requirement. To address the potential endogeneity issues, we adopt an instrumental variable approach and a two-sided matching model, and report consistent results. We also estimate a system of three equations through three-stage-least square estimator to accommodate the joint determination of price and non-price terms in loan contracts. In addition, we find that the effect of social trust on cost of bank loans is more prominent for firms located in provinces with relatively less developed formal institutions.

Keywords: Social trust; Cost of bank loans; Loan contracts; Formal institutions (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:83:y:2022:i:c:s1049007822000999

DOI: 10.1016/j.asieco.2022.101543

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