Informal or formal financing? Evidence on the co-funding of Chinese firms |
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| Institution: | 1. KU Leuven and CEPR, Department of Accountancy, Finance and Insurance, Naamsestraat 69, 3000 Leuven, Belgium;2. VU University Amsterdam, Department of Finance, De Boelelaan 1105, 1081HV Amsterdam, The Netherlands;3. University of Zurich, SFI and CEPR, Department of Banking and Finance, Plattenstrasse 32, CH-8032 Zurich, Switzerland;1. Ozyegin University, Turkey\n;2. World Bank, United States\n;3. Tilburg University, The Netherlands;4. CEPR, United Kindgom;1. Bank of Finland, PO Box 160, 00101 Helsinki, Finland;2. Bank of Finland, PO Box 160, 00100 Helsinki, Finland and University of Turku, Finland |
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| Abstract: | Different modes of external finance provide heterogeneous benefits for the borrowing firms. Informal finance offers informational advantages whereas formal finance is scalable. Using unique survey data from China, we find that informal finance is associated with higher sales growth for small firms but lower sales growth for large firms. We identify a complementary effect between informal and formal finance for the sales growth of small firms, but not for large firms. Co-funding, thereby simultaneously using the informational advantage of informal finance and the scalability of formal finance, is therefore the optimal choice for small firms. |
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