Cultural Preferences and the Choice between Formal and Informal Financing
44 Pages Posted: 9 Jun 2017
Date Written: May 1, 2017
This paper documents significant differences in the financing structure of small firms with managers of diverse cultural backgrounds. To separate the effect of culture from other factors that affect the financing structure of firms, we exploit cultural heterogeneity within a geographical area with shared regulations, institutions, and macroeconomic cycles. Our findings suggest that there exist significant differences in the culturally embedded preferences towards the use of formal and informal sources of financing (bank loans and trade credit). Our results are robust to alternative explanations based on potential differences in credit constraints and in the distribution of cultural origins across industrial sectors, trading partners, and headquarters location.
Keywords: Managerial cultural origin, Informal financing, Trade credit, Small firm financing
JEL Classification: Z10, G32, M14
Suggested Citation: Suggested Citation