The value of family social capital in informal financial markets: Evidence from China

Abstract

This study investigates whether and how family social capital influences borrowers' loan performance in informal financial markets. Using a unique dataset collected from an informal financial institution in Eastern China from 2014 to 2018, we show that a higher level of family social capital is associated with better loan performance, captured by lower default probability, lower loss ratio, and lower loss amount. The effect is more pronounced for borrowers with less access to formal financial markets and those with poorer financial conditions, while it is less pronounced for borrowers with higher risk preferences and those born in regions with high social trust. These results continue to hold after addressing endogeneity concerns and conducting a series of robustness tests. Overall, our study provides evidence that borrowers' family social capital creates value in the informal financial markets.