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Understanding Informal Financing

Franklin Allen, Meijun Qian () and Jing Xie

No 12863, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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: asymmetric information; Firm Growth; Informal financing; social collateral (search for similar items in EconPapers)
JEL-codes: G21 G30 O16 O17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-ent, nep-fdg, nep-iue and nep-pay
Date: 2018-04
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