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Formal, informal or co-funding? Evidence on the co-funding of Chinese firms


Ongena, Steven; Degryse, Hans; Lu, Liping (2016). Formal, informal or co-funding? Evidence on the co-funding of Chinese firms. Journal of Financial Intermediation, 27:31-60.

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.

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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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:July 2016
Deposited On:22 Dec 2016 10:15
Last Modified:23 Dec 2016 04:08
Publisher:Elsevier
ISSN:1042-9573
Publisher DOI:https://doi.org/10.1016/j.jfi.2016.05.003
Other Identification Number:merlin-id:13375

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