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Formal versus Informal Finance: Evidence from China
TLDR
In this paper, the authors take a closer look at firm financing patterns and growth using a database of 2,400 Chinese firms and find that a relatively small percentage of firms in the sample utilize formal bank finance with a much greater reliance on informal sources.Abstract:
China is often mentioned as a counter-example to the findings in the finance and growth literature since, despite the weaknesses in its banking system, it is one of the fastest growing economies in the world. The fast growth of Chinese private sector firms is taken as evidence that it is alternative financing and governance mechanisms that support China's growth. This paper takes a closer look at firm financing patterns and growth using a database of 2,400 Chinese firms. The authors find that a relatively small percentage of firms in the sample utilize formal bank finance with a much greater reliance on informal sources. However, the results suggest that despite its weaknesses, financing from the formal financial system is associated with faster firm growth, whereas fund raising from alternative channels is not. Using a selection model, the authors find no evidence that these results arise because of the selection of firms that have access to the formal financial system. Although firms report bank corruption, there is no evidence that it significantly affects the allocation of credit or the performance of firms that receive the credit. The findings suggest that the role of reputation and relationship based financing and governance mechanisms in financing the fastest growing firms in China is likely to be overestimated.read more
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Informal or Formal Financing? Or Both? First Evidence on the Co-Funding of Chinese Firms
TL;DR: In this paper, the authors identify a complementary effect between informal and formal finance for the sales growth of small firms, but not for large firms, and they find that informal finance is associated with higher sales growth for small firms and lower sales growth in large firms.
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The state advances, the private sector retreats? Firm effects of China’s great stimulus programme
Anders C. Johansson,Xunan Feng +1 more
TL;DR: The authors conducted an empirical analysis in which they exploited the launch of a large stimulus programme in the autumn of 2008 and found that state-owned enterprises (SOEs) are better able to maintain their leverage levels and have better access to both short and long-term debt compared with private firms after the stimulus.
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The dark side of rent-seeking: The impact of rent-seeking on earnings management
TL;DR: Li et al. as mentioned in this paper examined the impact of rent-seeking on a firm's earnings management, an important indicator of quality in accounting information, and showed that rentseeking strongly promotes more earnings management.
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The 7 Cs of rural credit in China
TL;DR: In this article, a survey of 897 farm households in Shaanxi and Gansu provinces, and extensive interviews of agricultural lenders conducted in the summer and fall of 2009 are used to explain a variety of credit issues in China.
References
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Financial Intermediation and Delegated Monitoring
TL;DR: In this paper, the authors developed a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders, and presented a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary.
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Financial Dependence and Growth
Raghuram G. Rajan,Raghuram G. Rajan,Raghuram G. Rajan,Luigi Zingales,Luigi Zingales,Luigi Zingales +5 more
TL;DR: This paper examined whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of external finance to firms, and found that industrial sectors that are relatively more in need of foreign finance develop disproportionately faster in countries with more developed financial markets.