Informal finance, trade credit and private firm performance

Jun Su (Business School, Beijing Technology and Business University, Beijing, People's Republic of China)
Yuefan Sun (Business School, Beijing Technology and Business University, Beijing, People's Republic of China)

Nankai Business Review International

ISSN: 2040-8749

Publication date: 4 October 2011

Abstract

Purpose

The purpose of this paper is to test the effect of informal finance and trade credit on the performance of private firms.

Design/methodology/approach

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.

Findings

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.

Practical implications

The policy implication is the Chinese Government should take careful steps to regulate informal financing sources.

Originality/value

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.

Keywords

Citation

Su, J. and Sun, Y. (2011), "Informal finance, trade credit and private firm performance", Nankai Business Review International, Vol. 2 No. 4, pp. 383-400. https://doi.org/10.1108/20408741111178816

Publisher

:

Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited

To read the full version of this content please select one of the options below

You may be able to access this content by logging in via Shibboleth, Open Athens or with your Emerald account.
To rent this content from Deepdyve, please click the button.
If you think you should have access to this content, click the button to contact our support team.