Summary:
Formal institutions can promote financial development and economic growth by reducing contract execution costs. However, once informal institutions such as trust are lacking, the implementation cost of a contract may be too high. Economists and sociologists have long acknowledged the importance of trust, but empirical studies on trust in financial markets have only emerged in recent years (Zingales, 2015). The literature focuses only on trust in the stock market (Li, 2006), bank credit market (Zhang and Li, 2012), and firm supply chains (Liu et al., 2009), while its impact on the bond market has not yet been studied. Yet the issue of trust in the bond market is crucial. First, compared with the bank credit market, the problem of information asymmetry in the bond market is difficult to alleviate effectively, especially when the credibility of credit rating agencies in China is questioned. Moreover, as the bond market has relatively low requirements for formal institutions relative to the stock market, the role of trust becomes even more important. Second, trust is a “public good” at the regional level. In recent years, many bond defaults in China have caused bond investors to distrust individual companies, and this distrust has spread to other companies in the same region. This paper takes all of the corporate bonds, enterprise bonds, and medium-term notes issued in China's bond market from 2008 to 2015 as the research sample, and uses the questionnaire survey conducted by Professor Zhang in 2000 through the “Chinese Entrepreneur Survey System” to obtain the level of trust in the provinces (Zhang and Ke, 2002). Relying on these data, we study the role of trust as an informal institution in the bond market. Bond issuance data and financial data are taken from the Wind database, the bond market index is from the China Bond Information Network, and the provincial macroeconomic data comes from the CSMAR database. Our results show that trust does help to improve the bond credit rating and reduce the bond credit spread, and this conclusion remains valid after applying different trust metrics, including possible omitted variables and instrumental variables. At the same time, this paper uses the data from The Supreme People's Court's “List of Defaulters” to construct indicators for the level of untrustworthiness in each province, and finds that an increase in untrustworthiness lowers the bond credit rating and increases the bond credit spread. Further, using path analysis, trust is found to affect bond financing both directly and indirectly by improving the quality of financial reporting. The results show that investors are not only subjectively more willing to believe in companies in high-trust areas, but that these companies are also objectively more credible. We also find that the positive effect of trust on bond ratings and pricing is more pronounced for state-owned enterprises, companies in areas with a developed financial industry, and companies that issue bonds more often. That is, the more repeated opportunities for interaction between investors and issuers, the greater the level of trust. The contributions of this paper are as follows. First, the existing research focuses on the impact of formal institutions on bond credit ratings and pricing, whereas this paper focuses on the crucial role of deep cultural factors such as trust in the bond market. Second, this paper seeks a new theoretical premise for the question of how trust develops—through repeated interaction opportunities. Studies have shown that informal institutions such as trust play an important role when investor protection is weaker or disclosure quality is lower (Aghion et al., 2010; Guiso et al., 2004; Pevzner et al., 2015). This paper identifies three variables related to repeated interactions and finds that when there are more opportunities for interaction, the role of trust is greater. It can be seen that the relationship between trust and the external environment is not simple. Our findings help to clarify the underlying reasons why trust plays a role in economic activity, and provide new evidence for the literature on the conditions under which trust can develop. The conclusions have important policy implications. The Chinese government takes formal institutions into account when promoting enterprises to reduce corporate financing costs. This paper shows that informal institutions such as trust are equally important to the development of China's bond market. It is even more important to strengthen the construction of trust as a regional public good when the crisis of distrust of individual companies spreads to other enterprises in the same region.
杨国超, 盘宇章. 信任被定价了吗？ ——来自债券市场的证据[J]. 金融研究, 2019, 463(1): 35-53.
YANG Guochao, PAN Yuzhang. Is Trust Priced？ Evidence from the Bond Market. Journal of Financial Research, 2019, 463(1): 35-53.
Aghion, P., Y.Algan, P.Cahuc and A.Shleifer, 2010, “Regulation and Distrust,” The Quarterly Journal of Economics, 125(3), pp.1015～1049.
[13]
Allen, F., J.Qian and M.Qian, 2005, “Law, Finance, and Economic Growth in China,” Journal of Financial Economics, 77(1), pp.57～116.
[14]
Ang, J.S., Y.Cheng and C.Wu, 2015, “Trust, Investment, and Business Contracting,” Journal of Financial and Quantitative Analysis, 50(3), pp.569～595.
[15]
Arrow, K.J., 1969, “The Organization of Economic Activity: Issues Pertinent to the Choice of Market versus Nonmarket Allocation,” The Analysis and Evaluation of Public Expenditure: The PPB System, 1, pp.59～73.
[16]
Chen, D., X.Liu and C.Wang, 2016, “Social Trust and Bank Loan Financing: Evidence from China,” Abacus, 52(3), pp.374～403.
[17]
Dechow, P.M., R.G.Sloan and A.P.Sweeney, 1995, “Detecting Earnings Management,” The Accounting Review, 70(2), pp.193～225.
[18]
Diamond, D.W., 1984, “Financial Intermediation and Delegated Monitoring,” The Review of Economic Studies, 51(3), pp.393～414.
[19]
Fukuyama, F., 1995, Trust: The Social Virtues and the Creation of Prosperity, Free Press Paperbacks.
[20]
Gambetta, D. ,2000, “Can We Trust Trust?”, in Gambetta, D. (eds.) Trust:Making and Breaking Cooperative Relations, electronic edition, Department of Sociology,University of Oxford, pp. 213~237.
[21]
Gentzkow, M.A.and J.M.Shapiro, 2004, “Media, Education and Anti-Americanism in the Muslim World,” The Journal of Economic Perspectives, 18(3), pp.117～133.
[22]
Guiso, L., P.Sapienza and L.Zingales, 2009, “Cultural Biases in Economic Exchange？” The Quarterly Journal of Economics, 124(3), pp.1095～1131.
[23]
Guiso, L., P.Sapienza and L.Zingales, 2004, “The Role of Social Capital in Financial Development,” The American Economic Review, 94(3), pp.526～556.
[24]
Guiso, L., P.Sapienza and L.Zingales, 2008, “Trusting the Stock Market,” The Journal of Finance, 63(6), pp.2557～2600.
[25]
Holmstro..m, B. ,2015, “Understanding the Role of Debt in the Financial System,” BIS working paper, No. 479.
[26]
Kothari, S.P., A.J.Leone and C.E.Wasley, 2005, “Performance Matched Discretionary Accrual Measures,” Journal of Accounting and Economics, 39(1), pp.163～197.
[27]
Kreps, David M.,1990, “Corporate Culture and Economic Theory,” in J. E. Alt and K. A. Shepsle(eds.) Perspectives on Positive Political Economy, Cambridge, England:Cambridge University Press, pp. 90~143.
[28]
La Porta, R., F.Lopez-De-Silanes, A.Shleifer and R.W.Vishny, 1997, “Legal Determinants of External Finance,” The Journal of Finance, 52(3), pp.1131～1150.
[29]
Mansi, S.A., W.F.Maxwell and J.K.Wald, 2009, “Creditor Protection Laws and the Cost of Debt,” Journal of Law and Economics, 52(4), pp.701～717.
[30]
Pevzner, M., F.Xie and X.Xin, 2015, “When Firms Talk, Do Investors Listen？ The Role of Trust in Stock Market Reactions to Corporate Earnings Announcements,” Journal of Financial Economics, 117(1), pp.190～223.
[31]
Putnam, R.D. ,1993, Making Democracy Work: Civic Traditions in Modern Italy, Princeton University Press.
[32]
Qi, Y.X., L.Roth and J.K.Wald, 2010, “Political Rights and the Cost of Debt,” Journal of Financial Economics, 95(2), pp.202～226.
[33]
Sobel, M.E., 1982, “Asymptotic Confidence Intervals for Indirect Effects in Structural Equation Models,” Sociological Methodology, 13, pp.290～312.
[34]
Uslaner, E.M., 2002, The Moral Foundations of Trust, Cambridge University Press.
[35]
Wu, W., M.Firth and O.M.Rui, 2014, “Trust and the Provision of Trade Credit,” Journal of Banking & Finance, 39, pp.146～159.
[36]
Ziebart, D.A.and S.A.Reiter, 1992, “Bond Ratings, Bond Yields and Financial Information.,” Contemporary Accounting Research, 9(1), pp.252～282.
[37]
Zingales, L., 2015, “The ‘Cultural Revolution' in Finance,” Journal of Financial Economics, 117(1), pp.1～4.
