DP9519 Informal or Formal Financing? Or Both? First Evidence on the Co-Funding of Chinese Firms

Author(s): Hans Degryse, Liping Lu, Steven Ongena
Publication Date: June 2013
Keyword(s): Co-Funding, Formal Finance, Growth, Informal Finance
JEL(s): G21, G32, P2
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9519

The recent financial crisis has reopened the debate on the impact of informal and formal finance on firm growth in developing countries. Using unique survey data, we find that informal finance is associated with higher sales growth for small firms and 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. Informal finance offers informational and monitoring advantages, while formal finance offers relatively inexpensive funds. Co-funding, i.e. the simultaneous use of formal and informal finance, is the optimal choice for small firms.