Formal Versus Informal Finance : Evidence from China

By Meghana Ayyagari, Asli Demirgüç-Kunt, Vojislav Maksimovic. 2008

963 citations recorded by the source corpus.

China is often mentioned as a counterexample 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.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/a886d435d96113391169e0dfd655d913819f819c

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Citations in the corpus

Access to Finance (2008, background): “Ayyagari, Demirgüç-Kunt, and Maksimovic (2008b) use firm-level survey data to explore the relative importance of different features of the business environment.”
Economic Policy Uncertainty and Capital Structure Choice: Evidence from China (2015, background): “Therefore the supporting effects from trade credit may exceed that from commercial bank loan, especially for non-state firms (Allen et al., 2005; Ayyagari et al., 2010).”
Political Capital in a Market Economy (2010, neutral): “Another measure of political capital is whether a firm receives “government support” in acquiring resources and services (Ayyagari et al. 2008).”
China's 'Mercantilist' Government Subsidies, the Cost of Debt and Firm Performance (2018, neutral): “However, Ayyagari et al. (2010) find that Chinese firms with bank financing grow faster than firms without bank financing, and these authors question whether reputation- and relationship-based financing is responsible for the performance of the fastest-growing non-state firms in China.”
Institutions, ownership structures, and distress resolution in China☆ (2013, background): “Ayyagari et al. (2010) find that, despite China's weak financial system, banks play an important role in firm finance.”
Corruption, growth, and governance: Private vs. state-owned firms in Vietnam (2012, neutral): “12 and are comparable to those reported by other studies on firm-level economic growth (e.g., Allen et al., 2007; Ayyagari et al., 2010).”
Financing Firms in India (2006, neutral): “Our evidence thus far documents the prevalence of alternative institutions and finance in the Indian economy, but an equally important question is whether alternative finance is as conducive as bank or market finance in supporting growth.(5) The prevailing view is that despite the limited supply of ”
The Impact of Bank and Non-Bank Financial Institutions on Local Economic Growth in China (2010, background): “Our finding sharpens the insights of Allen et al. (2005) on the one hand, and Ayyagari et al. (2007), Demetriades et al. (2008), and Rousseau and Xiao (2007), on the other hand, which mainly argue that only the informal and formal financial sector drive growth, respectively.”