Social Network, Financial Market Participation and Asset Allocation: Evidence from China

According to the 2011 Chinese Household Finance Survey, about 21.8% of Chinese households participate in the financial market; risky financial assets account for about 8% of total household financial assets. Limited participation and low risky asset holding appear as two features of Chinese household finance. This paper explores the effects of social network, as an important content of social capital, on household financial market participation and asset allocations in both the formal and informal financial markets. Our analysis shows that households with a broader social network admit a higher possibility of financial market participation and a higher fraction of risky asset holding. This finding is robust to various control variables and to the instrumental variable estimations. In addition, two working mechanisms are identi ed. On the one hand, social network directly helps households to obtain necessary information, reducing the required participation cost and raising the chance of financial market participation. On the other hand, social network functions as an informal institution that facilitates household risk-sharing and affects their risk attitude, hence indirectly changing household financial market decisions.