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Informal or formal financing? Evidence on the co-funding of Chinese firms

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  • Degryse, Hans
  • Lu, Liping
  • Ongena, Steven

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.

Suggested Citation

  • Degryse, Hans & Lu, Liping & Ongena, Steven, 2016. "Informal or formal financing? Evidence on the co-funding of Chinese firms," Journal of Financial Intermediation, Elsevier, vol. 27(C), pages 31-50.
    • Handle: RePEc:eee:jfinin:v:27:y:2016:i:c:p:31-50
    DOI: 10.1016/j.jfi.2016.05.003
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    More about this item

    Keywords

    Informal finance; Formal finance; Co-funding; Growth;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • P2 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies

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