Understanding Informal Financing

50 Pages Posted: 6 May 2019 Last revised: 9 Sep 2021

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Meijun Qian

Zhejiang University International Business School

Jing Xie

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

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Date Written: June 16, 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: informal financing, asymmetric information, social collateral, firm growth

JEL Classification: G21, G30, O16, O17

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

Franklin Allen

Imperial College London ( email )

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

Meijun Qian (Contact Author)

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/

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