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Formal versus Informal Finance: Evidence from China

Author

Listed:
  • Meghana Ayyagari
  • Asli Demirgüç-Kunt
  • Vojislav Maksimovic

Abstract

The fast growth of Chinese private sector firms is taken as evidence that informal finance can facilitate firm growth better than formal banks in developing countries. We examine firm financing patterns and growth using a database of twenty-four hundred Chinese firms. While a relatively small percentage of firms utilize bank loans, bank financing is associated with faster growth whereas informal financing is not. Controlling for selection, we find that firms with bank financing grow faster than similar firms without bank financing and that our results are not driven by bank corruption or the selection of firms that have accessed the formal financial system. Our findings question whether reputation and relationship-based financing are responsible for the performance of the fastest-growing firms in developing countries. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Suggested Citation

  • Meghana Ayyagari & Asli Demirgüç-Kunt & Vojislav Maksimovic, 2010. "Formal versus Informal Finance: Evidence from China," The Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 3048-3097, August.
    • Handle: RePEc:oup:rfinst:v:23:y:2010:i:8:p:3048-3097
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    File URL: http://hdl.handle.net/10.1093/rfs/hhq030
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