Can past informality impede registered firms’ access to credit?

Dorgyles C.M. Kouakou
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Dorgyles C.M. Kouakou: Univ Rennes, CNRS, CREM – UMR6211, F-35000 Rennes France

Economics Working Paper Archive (University of Rennes & University of Caen) from Center for Research in Economics and Management (CREM), University of Rennes, University of Caen and CNRS

Abstract: Using a large firm-level dataset from the World Bank Enterprise Surveys, which covers 134 countries from 2006 to 2023 and includes over 134,000 observations, we examine whether past informality affects the credit constraints of registered firms. Estimations, based on the entropy balancing method, indicate that registered firms that began operations informally are more likely to be credit-constrained than those that started in the formal sector. This finding is extremely robust to a variety of robustness tests, including instrumental variables, propensity score matching, potential omitted variables, restricted samples, alternative measures of credit constraints, different specifications such as Linear Probability, Logit, and Probit models, and clustering standard errors at the country level. Heterogeneity analysis reveals that the detrimental impact of past informality lessens with firm size, firm age, and better structural factors like regulatory quality, trade openness, entrepreneurial dynamism, and public spending. Productivity, competition from the informal sector, and the quality of financial statements are key channels through which past informality increases credit constraints for registered firms.

Keywords: Past informality status; Credit constraints; Entropy balancing (search for similar items in EconPapers)
JEL-codes: G20 O12 O16 O17 (search for similar items in EconPapers)
Date: 2024-09
New Economics Papers: this item is included in nep-cfn, nep-dev, nep-ent, nep-eur, nep-iue and nep-sbm
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