Money Following Trust: Evidence from China’s High‐Value Payment System

• Author: Tingqiu Cao,Guangli Zhang,Xianhang Qian
• DOI: http://doi.org/10.1111/irfi.12184
• Published date: 01 June 2019
• Date: 01 June 2019

Money Following Trust: Evidence

from China’s High-Value Payment

System*

XIANHANG QIAN

†

,GUANGLI ZHANG

‡

AND TINGQIU CAO

†

†

School of Economics, Shandong University, Jinan, Shandong, China and

‡

The Business School, Central University of Finance and Economics, Beijing, China

ABSTRACT

This study enriches the economic consequence of trust from the perspective

of cash flow. It analyzes the impact of trust on interprovincial cash flow

using matching data pertaining to Chinese provincial trust and the high-

value payment system in 2006–2010. It further investigates trust’s effect in

different legal protection scenarios to explore the interactive role of formal

and informal institutions. The results indicate that trust can significantly

promote interprovincial cash flow and it persists after addressing endogene-

ity concerns and across different methods. However, this effect is only signif-

icant or much larger in provinces with less legal protection, indicating the

alternative roles played by trust and formal institutions.

JEL Codes: E22; P37; Z13

Accepted: 27 December 2017

I. INTRODUCTION

Trust is regarded as an important aspect of social capital impacting economic

development (Arrow 1972; Barro and Sala-i-Martin 2004). It can not only lead

to better functioning public institutions but can also reduce market imperfec-

tions, facilitating economic transactions (Alesina and La Ferrara 2002). Exist-

ing studies have demonstrated that a higher level of trust can promote

macrofinancial development, international trade (Guiso et al. 2004, 2009),

and economic growth (Zak and Knack 2001), as well as microcorporate financ-

ing (Bottazzi et al. 2016) and mergers and acquisitions (Ahern et al. 2015).

However, there is a lack of evidence of the impact of trust on cash flow.

Therefore, this paper attempts to fill this gap by exploring the impact of trust

on cash flow.

* We would like to thank Professor Sudipto Dasgupta (Editor) and two anonymous reviewers for

their valuable and insightful comments. The authors acknowledge financial support from the Pro-

gram of Qilu Young Scholars of Shandong University, the Program for Innovation Research in Cen-

tral University of Finance and Economics, and the Taishan Scholar Program of Shandong Province.

© 2018 International Review of Finance Ltd. 2018

International Review of Finance, 19:2, 2019: pp. 385–412

DOI: 10.1111/irfi.12184

China provides an ideal environment for studying this issue. First, as a vast

country consisting of more than 30 provinces, China contains distinctive cul-

tures, providing a relatively heterogeneous set of institutional features to mea-

sure trust within a country. Second, there is a clean measurement of cash flow

through a bilateral setting: China’s high-value payment system (HPS). Third,

using enterprise data from the Chinese Enterprise Survey provides a clear indi-

cator of bilateral trust, unlike studies using household data. Thus, we present an

empirical study of the impact of trust on cash flow using matching data on Chi-

nese provincial bilateral trust and interprovincial cash flow.

We have found that trust significantly increases the quantity and frequency

of interprovincial cash flow in China. The effect persists even when considering

the impact of endogeneity and multiple environments. Finally, we investigated

the interactive role of trust and formal institutions and have found an alterna-

tive effect from trust and formal institutions on cash flow.

This paper expands three different aspects of previous research. First, it

enriches studies on the economic consequences of trust, as few studies focus

directly on trust and cash flow, while we link trust and data from the payment

system to explore the impact of trust on cash flow. Second, the paper expands

the literature on the interactive relationship between formal and informal institu-

tions affecting economic outcomes. We investigate the impact of trust on cash

flow in different legal environments, highlighting the existence of substitutabil-

ity. Third, this paper is a pioneering study in that it tests the relationship between

trust and cash flow within a single country. Most studies focusing on trust and

economic exchange have been based on cross-country samples, and the results

are influenced by country-specific characteristics. This paper examines this issue

using provincial data within one country, avoiding country-specific effects.

The remainder of this paper is organized as follows: Section II sets out the

main hypothesis, and Section III describes the data and the empirical method-

ology. The empirical results are presented in Section IV. Section V analyzes the

interactive role of trust and legal protection, and Section VI provides robustness

checks. Section VII presents the conclusions.

II. HYPOTHESIS DEVELOPMENT

China is an enormous country with many different regions and a long history.

Substantial variation exists across Chinese regions when it comes to characteris-

tics such as dialect, social norms, ethnicity, and other important cultural

aspects. This has resulted in a multitude of local cultures in China, such as dif-

ferent religious beliefs and dialects (Gao and Long 2014), which cause major

heterogeneity in trust among China’s different provinces (Zhang and Ke 2002;

Ang et al. 2015).

Regarding the relationship between trust and cash flow, we argue that the

most critical mechanism is trust’s ability to significantly improve the likelihood

of cooperation among economic entities, leading to increased interprovincial

© 2018 International Review of Finance Ltd. 2018386

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