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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
Citations
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The contingent value of social resources: Entrepreneurs' use of debt-financing sources in Western China
TL;DR: This paper found that more business or political contacts increase entrepreneurs' probability of using formal financial sources, and more urban ties increases their probability of use informal sources, however, the effects of business and bureaucratic ties are contingent on community-level institutional trust and on firms' age.
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Trust and SME attitudes towards equity financing across Europe
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Monetary stimulation, bank relationship and innovation: Evidence from China
TL;DR: In this article, the authors used China's four trillion yuan stimulus package of 2008 (4 Trillion Plan) as an exogenous shock, and found that monetary stimulation could benefit the real economy to some extent.
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Disguised corruption: Evidence from consumer credit in China
TL;DR: Li et al. as discussed by the authors show that government bureaucrats receive 16% higher credit lines than non-bureaucrats with similar income and demographics, but their accounts experience a significantly higher likelihood of delinquency and debt forgiveness.
References
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Finance and Growth: Schumpeter Might Be Right
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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.
ReportDOI
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.