Understanding Informal Financing

53 Pages Posted: 16 Apr 2018

See all articles by Franklin Allen

Franklin Allen

Imperial College London; European Corporate Governance Institute (ECGI)

Meijun Qian

Zhejiang University International Business School

Jing Xie

University of Macau, Faculty of Business Administration, Department of Finance and Business Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 2018

Abstract

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

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Meijun Qian

Zhejiang University International Business School ( email )

718 Haizhou East Road, Xiashi
ZIBS building
Haining
China

Jing Xie

University of Macau, Faculty of Business Administration, Department of Finance and Business Economics ( email )

E22-4064, FBA building
Macau
Macau, 000000
China
+853 88224639 (Phone)

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
54
Abstract Views
1,269
Rank
276,542
PlumX Metrics