Formal Versus Informal Finance : Evidence from China
The fast growth of Chinese private sector firms is taken as evidence that informal finance can facilitate firm growth better than formal banks in developing countries. We examine firm financing patterns and growth using a database of twenty-four hundred Chinese firms. While a relatively small percentage of firms utilize bank loans, bank financing is associated with faster growth whereas informal financing is not. Controlling for selection, we find that firms with bank financing grow faster than similar firms without bank financing and that our results are not driven by bank corruption or the selection of firms that have accessed the formal financial system. Our findings question whether reputation and relationship-based financing are responsible for the performance of the fastest-growing firms in developing countries.
| Main Authors: | , , |
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| Format: | Journal Article biblioteca |
| Language: | EN |
| Published: |
2010
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| Subjects: | Banks, Other Depository Institutions, Micro Finance Institutions, Mortgages G210, Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure G320, Firm Performance: Size, Diversification, and Scope L250, Economic Development: Financial Markets, Saving and Capital Investment, Corporate Finance and Governance O160, Socialist Institutions and Their Transitions: Financial Economics P340, |
| Online Access: | http://hdl.handle.net/10986/4818 |
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| Summary: | The fast growth of Chinese private sector firms is taken as evidence that informal finance can facilitate firm growth better than formal banks in developing countries. We examine firm financing patterns and growth using a database of twenty-four hundred Chinese firms. While a relatively small percentage of firms utilize bank loans, bank financing is associated with faster growth whereas informal financing is not. Controlling for selection, we find that firms with bank financing grow faster than similar firms without bank financing and that our results are not driven by bank corruption or the selection of firms that have accessed the formal financial system. Our findings question whether reputation and relationship-based financing are responsible for the performance of the fastest-growing firms in developing countries. |
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