Understanding informal financing |
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| Affiliation: | 1. Brevan Howard Centre for Financial Analysis, Imperial College London, UK;2. College of Business and Economics, Australian National University, Australia;3. School of Accounting and Finance, Hong Kong Polytechnic University, Hong Kong;1. Boston University, Department of Economics, 270 Bay State Road, Boston 02215, USA;2. University of New South Wales, School of Economics, Sydney 2052, Australia;1. Ho Chi Minh City Open University, Ho Chi Minh City, Vietnam;2. Financial and Banking University, Ha Noi, Vietnam;1. Federal Reserve Bank of New York, 33 Liberty Street, Main 3, New York, NY 10045, United States;2. Federal Reserve Bank of New York & Nova School of Business and Economics, 33 Liberty Street, Main 3, New York, NY 10045, United States;1. University of Duisburg-Essen, Lotharstr. 65, 47057 Duisburg, Germany;2. Brazilian School of Public and Business Administration, Getulio Vargas Foundation, Rua Jornalista Orlando Dantas 30, 22231-010 Rio de Janeiro, Brazil;3. Braunschweig Institute of Technology, Abt-Jerusalem-Str. 7, 38106 Braunschweig, Germany;1. Korea Capital Market Institute, Korea;2. Department of Finance, University of Illinois at Urbana-Champaign, USA |
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| 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. |
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