The purpose of this paper is to test the effect of informal finance and trade credit on the performance of private firms.
Based on a survey to private firms in 19 cities, the paper empirically tests the promoting effects of informal finance and trade credit on the performance of private firms in China.
It was found that informal finance and trade credit have positive effects on private firms' performance measured by ROA. The net income reinvestment rate of private firms is positively related to whether or not the firm adopts informal financing or trade credit financing. A private firm having limited access to formal finance is more inclined to rely on self‐funds and is more limited by financing choices. Informal financing and trade credit can relieve the tension of cash flow chain but cannot solve the financing constraints. The empirical results also show that bank credit is still not the main financing choice for private firms and has not yet played a promoting role in private firms' performance and growth. Informal finance is more important to promote performance in manufacturing industry, while trade credit is more effective in wholesale and trading industry. The results show the coexistence viability of informal financing channels and formal financial institutions in China.
The policy implication is the Chinese Government should take careful steps to regulate informal financing sources.
After some theoretical literature, such as Lin and Sun, this paper explores for the first time the effect of informal financing channels on the performance of private firms.
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