Understanding Informal Financing

53 Pages Posted: 16 Apr 2018

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Meijun Qian

Australian National University (ANU) - College of Business and Economics

Jing Xie

University of Macau

Multiple version iconThere are 2 versions of this paper

Date Written: April 2018


This paper offers a framework to understand informal financing based on mechanisms to deal with asymmetric information and enforcement. We find that constructive informal financing such as trade credits and family borrowing that relies on information advantages or an altruistic relationship is associated with good firm performance. Underground financing such as money lenders who use violence for enforcement is not. Constructive informal financing is prevalent in regions where access to bank loans is extensive, while its role in supporting firm growth decreases with bank loan availability. International comparisons show that China is not an outlier but rather average in using informal financing.

Keywords: asymmetric information, Firm Growth, Informal financing, social collateral

JEL Classification: G21, G30, O16, O17

Suggested Citation

Allen, Franklin and Qian, Meijun and Xie, Jing, Understanding Informal Financing (April 2018). CEPR Discussion Paper No. DP12863, Available at SSRN: https://ssrn.com/abstract=3163496

Franklin Allen (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Meijun Qian

Australian National University (ANU) - College of Business and Economics ( email )


Jing Xie

University of Macau ( email )


HOME PAGE: http://https://fba.um.edu.mo/faculty/jingxie/

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