Understanding Informal Financing

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: informal financing, asymmetric information, social collateral, firm growth

JEL Classification: G21, G30, O16, O17

Suggested Citation: Suggested Citation

Allen, Franklin and Qian, Meijun and Xie, Jing, Understanding Informal Financing (June 16, 2018). Journal of Financial Intermediation, July 2019, Vol.39, pp. 19-33. , Available at SSRN: https://ssrn.com/abstract=3369996 or http://dx.doi.org/10.2139/ssrn.3369996