Social Trust and Bank Loan Financing: Evidence from China

Using a sample of non-state-owned enterprises (NSOEs) in China, we investigate the impact of social trust on firms' access to bank loan financing. We find that privately controlled firms in trust-intensive regions are more likely to obtain loans from banks than those in regions with a lower level of social trust. The positive effect of trust on access to bank loans is more pronounced for firms that have no political connections, firms that are located in regions with poor legal environments, and firms that hire less reputable auditors. We also examine the channels through which social trust promotes bank finance. The results show that firms in trust-intensive regions have a lower likelihood of default and higher financial reporting quality. Finally, we find that loans to NSOEs in trust-intensive regions are associated with fewer collateral requirements, longer maturity, and lower interest rate spread. Overall, these findings suggest that social trust alleviates lenders' concerns regarding moral hazard and plays an important role when NSOEs raise capital from the bank loan market.