Is starting and staying unregistered longer beneficial for firms? The moderating role of institutional quality

Abstract

PurposeThis study examines the impact of initial informality years on subsequent firm performance and the moderating effect of institutional quality on this relationship.Design/methodology/approachThe study draws on the World Bank Enterprises Survey (WBES) data covering 116 developing economies over the 2006–2018 period. The study also utilizes data from the Heritage Foundation, the World Bank World Development Indicators (WDI) and the Fraser Institute Economic Freedom Database.FindingsThe study demonstrates that firms that start operation without formal registration perform better than firms that start operation formally. However, contrary to prior studies that show a linear relationship between time spent unregistered and subsequent firm performance, this study finds a non-monotonic relationship between the two – taking an inverted–U shape form. The study further shows that institutional quality at country level moderates this relationship such that firms operating in countries marked by poorly functioning formal institutions benefit from remaining unregistered longer.Originality/valueThis study is the first to show a non-monotonic relationship between the time firms spend without registration and their subsequent performance. By doing so, it reconciles the contradicting findings in the extant literature regarding the relationship between the two variables. It also identifies one important boundary condition – institutional quality – that moderates this relationship.