Effect of trust on financial market participation: evidence from China

Abstract

This article explores the effect of trust on financial market participation in China using the China Family Panel Studies, a comprehensive national survey dataset. We find that trust is a crucial factor of financial market participation. Using regional average trust scores as an instrument, we find that investors with higher level of trust are more likely to invest in financial markets, and to allocate a higher percentage of wealth to financial products such as stocks and bonds. Moreover, the impact of trust on financial market participation is cross-sectionally different. While trust significantly promotes financial market participation for wealthier households, its effect is not significant for less wealthy households. And trust has a larger effect on participation for those with less financial knowledge in general. For the above-median-wealth households in particular, trust encourages financial market participation only for those with financial knowledge below the average.