Alternative Financing Channels Research Articles

The ebb and flow of trade credit: implications for financing financially dependent firm growth

PurposeThis study investigates the significance of trade credit (TC) as an alternative source of funding in financing the growth of financially dependent firms.Design/methodology/approachPanel data analysis using the difference generalized method of moments (GMM) and fixed-effects ordinary least squares (FE-OLS) is conducted on annual data from publicly listed firms across a number of developing economies. The data cover the period from 2003 to 2019.FindingsThe findings indicate that financially dependent firms rely on TC to manage their growth, especially when they have exhausted their debt capacity. This dependence on TC displays a cyclical pattern. As firms enhance their financial position, they tend to scale back their dependence. Nevertheless, firms with significant growth opportunities continue utilizing TC for at least two years after their initial identification as financially dependent.Practical implicationsThe author's conclusion highlights that TC can be a valuable and accessible source of funding, especially in developing economies where the real sector may require alternative financing channels. Hence, TC has the potential to play a very significant role in financing corporate growth in these economies.Originality/valueThe current study adds to the existing body of literature by revealing that access to alternative sources of finance is also critical for firms that are dependent on external sources and for firms that have exhausted their financial debt capacity.

Pandemic Chaos: Equity-based Crowdfunding in Malaysia

Background: Malaysia, like the majority of other countries, has a system in place to ensure that SMEs do not continue to suffer as a result of the proliferation of Covid-19. Among the measures implemented is the assistance of crowdfunding sites to guarantee that SMEs have alternative financing channels even in the event of a calamity. Furthermore, the entrepreneur must work to solve the challenges that occur as a result of the pandemic. Objectives: To investigate the ECF as an alternate source of capital throughout the Covid-19 choas. Methodology: The content on the Pitch Platforms Sdn Bhd’s website from March 18, 2020, to April 5, 2021, as well as the relevant literature on the prospects of crowdfunding in assisting entrepreneurs in acquiring money amid the Covid-19 issue, were observed. Findings/ Implications: The study focuses on the usage of online funding via equity-based platforms in Malaysia during the outbreak. The ECF has a significant impact on Malaysian entrepreneurial finance. ECF encourages the development of crisis-resistant business models and raises entrepreneurs' understanding of digitization, technology, and web financing for expansion plans, particularly in potential business concepts. This analysis also indicates some intriguing research directions.

Real effect of bond yield liberalization on corporate investment

This paper provides evidence on the real effect of bond yield liberalization from the perspective of firms’ capital expenditure. Using the break of rigid payment in the Chinese bond market, we find that treated firms’ investments decrease after bond yield liberalization. We argue that firms’ expectation of future financial constraints changes due to the liberalization of bond yield. To verify the mechanism, we present that the effect of bond yield liberalization is more pronounced for firms with severer financial constraints, firms with fewer alternative financing channels, and firms non-state-owned. Overall, we provide a possible dark side of bond market liberalization.

The impact of green credit policy on firms' green strategy choices: green innovation or green-washing?

Taking the green credit policy in 2012 as a quasi-natural experiment, this paper has investigated the impact of green credit policy on Chinese firms' green strategy choices by using the panel data of A-share listed firms from 2008 to 2019. The results reveal that green credit improves firms' green innovation overall. In terms of time, the green-washing behavior of listed firms will increase significantly in the early stage of the implementation of green credit policy, but as time goes by, such green behavior of firms will be detected, which in turn will motivate firms to improve green innovation. Furthermore, the green credit policy has a more significant effect on green innovation of firms in localities under high environmental regulation, economically developed regions, and without other alternative financing channels. Firms located in regions with economically underdeveloped and low environmental regulation are more inclined to adopt the behavior of green-washing environmental information. Besides, after the implementation of the green credit policy, green innovation can improve corporate financial, environmental, and social performance, while green-washing behavior will damage corporate financial, environmental, and social performance. Our findings contribute to the literature on green credit policy, corporate green innovation, and environmental information disclosure, and also provide policy implications for improving the quality of green credit policy in the future.

Smart Hospitality and Secure Tourism Management using Blockchain Technology: BESHosTM Approach

Throughout the age of 5G technology, the majority of contactless banking is made via software that is enabled by a wide range of financial platforms. Several alternative financing channels provide access to a variety of services. The opportunity for hackers to engage in nefarious behaviour such as payment account hacking, identity theft, and payment system assaults stages of clearances with e-tourism, monetary information is kept in a database. Payment issues can be caused by a centralised cloud server. Throughout the periods of heavy congestion, the abovementioned problems are solvable by utilising a decentralised system like blockchain, it allows for the maintenance of trustworthiness between distinct groups of financial institutions, tour companies, airways, and trains are examples of consumers. Cruise ships, accommodations, cafes, as well as regional cabs are all available. Inspired mostly by following the foregoing debate, we suggest the blockchain Enables Secure Smart Hospitality and Tourism Management (BESHosTM) model.

Financing R&D in Chinese private firms: Business associations or political connection?

Using a new and unique dataset of Chinese private firms, this paper explores how private firms access bank loans to finance innovative activities. The results reveal that political connection, rather than membership in a government-controlled business association, largely determines private firms' innovations by providing access to bank loans. Furthermore, the “grease-the-wheels” mechanism of political connection is stronger if the firms are more constrained financially, located in regions with low levels of financial development, or located in regions with relatively under-developed institutional environments. Finally, cash flow, used to measure internal financing, and trade credit, used to measure informal financing, are important alternative financing channels and support firms' R&D investments. Our paper implies that China's government needs to continue fostering a good financing environment and supporting innovation activities.

A Review of China's Institutions

The spectacular economic growth in China during the past four decades has inspired a great deal of research to understand China's unconventional growth path. This review focuses on recent developments in China's institutions, financial markets, innovations, and government–business relations in the context of their roles in supporting China's growth. The government's role in finance and the economy has advantages and disadvantages in comparison to developed markets in the West. Alternative financing channels and governance mechanisms, rather than markets and banks, continue to promote growth in the most dynamic sectors of the economy, despite the fact that China has passed the early-development stage. More research is needed to understand the Chinese experience and determine whether similar mechanisms are behind the growth of other economies.

A Review of China’s Institutions

The spectacular economic growth in China in the past four decades has inspired a large strand of research to understand China's unconventional growth path. This paper focuses on the recent development of China's institutions, financial markets, innovations and government-business relations in the context of their roles in supporting China's growth. The government's role in finance and the economy has advantages and disadvantages as compared to developed markets in the West. Alternative financing channels and governance mechanisms, rather than the markets and banks, continue to promote growth in the most dynamic sectors of the economy, despite the fact that China has passed the early-development stage. More research is needed to understand the Chinese experience and see whether similar mechanisms are behind the growth in other economies.

The Role of Participation Banking as Alternative Financing Channels to Substitute for Deposit Banks and its Growth in the Turkish Finance Market - Period: 2007-2015

Financial systems and companies have become the most important reasons in the weakness of world economic system. The formation and development process of the financial structure also constitute the infrastructure of the world economic system. The path of the financial system and development has led to discuss with the financial crisis in 2008-2011. One of the solutions in order to reduce problems caused by the conventional banking system is alternative financing systems. In Turkey, the corporations based on profit share system are named participation banks. These banks which settle on different principles in the risk distribution of the portfolio acquired are analyzed more nowadays. Participation based banks are placed in practically every regulation related to banking terms and get their legal infrastructure more steady in the banking legislation of Turkey. This study is a continuation of a series related to the situation of participation banking in Turkey. On the other hand, the literature and the history of participation banking have been given less attention in this study. Literature information on methods in participation banks has been described in previous work of the series. Two analyzes were conducted in this study. One analysis is interpretive analysis that expresses the situation of applications of participation banking against banking risks. The other is an analysis of the figures of participation banks in Turkey as a continuation of the series. This study is a 2007-2015 part of research series. The study tries to explore the place and the importance of participation based banking with the various sub-headings, especially in Turkey. For this reason, we examine the comparative review 2007-2015 data of participation banks which are composed of Total Assets, Equity Net Profit, Collected Funds and Bank Loan Funds. Then we compare the total figures with deposit banks for the same period in Turkey.

Financial Development and Patterns of Industrial Specialization: Evidence from China*

This article investigates the influence of financial development on patterns of industrial specialization across China’s regions. We find that industrial sectors reliant on access to external finance tend to concentrate in regions with well-developed financial markets. Both foreign direct investment (FDI) and alternative financing channels are shown to play significant roles in shaping patterns of industrial specialization in China. In contrast, proxies for formal financial markets, for example, the banking system and capital markets, have few effects on regional industrial agglomeration. This result remains robust to instrumental variable estimation, alternative model specifications, and controlling for other traditional determinants of regional specialization.

China’s Financial System: Growth and Risks

We provide an updated and comprehensive review of China's financial system and explore the possible challenges in the future. First, China's financial system has been dominated by a large banking sector, which has played an important role in financing the real economy in the past decades. With the interest rate liberalization, the profitability of banks will go down and the competition in the banking sector will become stronger in the future. Moreover, this sector still needs to meet the challenge to reduce the amount of nonperforming loans. Second, the role of the stock market in allocating resources in the economy has been limited and ineffective. However, with the rapid growth of the markets and the introduction of more financial products, financial markets are expected to play a more important role in the economy going forward. Third, a nonstandard sector that consists of alternative financing channels is the most successful part of the financial system in terms of supporting the growth in the past decades. The co-existence of this sector with banks and markets can continue to support the growth of private and local government firms. Finally, in order to sustain the economic growth in China, policies need to reduce the likelihood of damaging financial crises, including a banking sector crisis, a real estate or stock market crash, and a twin crisis in the currency market and banking sector.

Financial Intermediation, Markets, and Alternative Financial Sectors

We provide a comprehensive review of firms’ financing channels (internal and external, domestic and international) around the globe, with the focus on alternative finance — financing from all the non-market, non-bank external sources. We argue that while traditional financing channels, including financial markets and banks, provide significant sources of funds for firms in developed countries, alternative financing channels provide an equally important source of funds in both developed and developing countries. Alternative finance is often the dominant source of funds for firms in fast-growing economies. We compare market- and bank-finance with alternative finance, along with the supporting mechanisms such as legal and institutional structures. Much more research is needed to better understand alternative finance and its role in corporate financing. We suggest ways to obtain firm-level data on various forms of alternative finance and thus overcome the main obstacle in the field.

China’s Financial System: Opportunities and Challenges

We provide a comprehensive review of China's financial system, and explore directions of future development. First, the financial system has been dominated by a large banking sector. In recent years banks have made considerable progress in reducing the amount of non-performing loans and improving their efficiency. Second, the role of the stock market in allocating resources in the economy has been limited and ineffective. We discuss issues related to the further development of China's stock market and other financial markets. Third, the most successful part of the financial system, in terms of supporting the growth of the overall economy, is a non-standard sector that consists of alternative financing channels, governance mechanisms, and institutions. The co-existence of this sector with banks and markets can continue to support the growth of the Hybrid Sector (non-state, non-listed firms). Finally, among the policies that will help to sustain stable economic growth in China are those that reduce the likelihood of damaging financial crises, including a banking sector crisis, a real estate or stock market crash, and a twin crisis in the currency market and banking sector.

Bank Loans and Trade Credit Under China's Financial Repression

China has maintained a financial system with favorable treatments toward state-owned enterprises. Albeit having been denied access to formal financing such as bank loans, China's non-state firms have grown rather fast. China's experience has often been interpreted as indicating that alternative informal financing channels such as trade credit can substitute for formal financing and support firm growth. In this study, we systematically compare the relative importance of bank loans and trade credit in promoting firm performance and firm growth, and find that access to bank loans is more important than does availability of trade credit. Our results imply that firms cannot get around financial repression through alternative financing channels, and suggest that it is an imperative to dismantle the financial repression regime so as to promote firm growth and performance.

Ownership, institutions, and capital structure: Evidence from China

We employ a unique data set to explore the role of ownership structure and institutional development in debt financing of non-publicly traded Chinese firms. We show that state ownership is positively associated with leverage and firms’ access to long-term debt, while foreign ownership is negatively associated with all measures of leverage. Surprisingly, firms in better developed regions are associated with reduced access to long-term debt, suggesting the availability of alternative financing channels and the tightening of the lending standards under the on-going banking reform. The combination of ownership structures and institutions explains up to 6% of the total variation in firms’ leverage decisions, while firm characteristics alone explain no more than 8% of the variation. Further, we show that non-state-owned firms tend to have lower total and short-term debt than their state-owned counterparts in less developed regions. Finally, we show that state-owned firms’ easy access to long-term debt is positively associated with long-term investment and negatively associated with firm performance.

The Financial System Capacities of India and China

The extraordinary performance of China and India's economies raises questions about the traditional measures of the size and depth of financial systems. While banks and markets have played a limited role in providing funds for corporate sectors and supporting economic growth in these two countries, non-state, non-listed firms, relying mostly on internal and alternative financing channels, have been growing faster than the state and listed sectors and contributing much of the growth. The alternative financing channels, excluded in the traditional measures of financial systems, operate outside legal institutions and are backed by alternative mechanisms such as reputation, relationships, and trust. We define the capacity of a financial system to be the total funding available for all corporate sectors in an economy. Our findings from China and India demonstrate that alternative finance can significantly expand the financial system capacity and promote growth at the firm level and economy wide.

The Financial System Capacities in China and India

In this paper we examine and compare the formal systems of law and finance in China and India and the alternative institutional arrangements and governing mechanisms in the two countries, and the relation between the development of these systems and their economic growth. China differs from most of the countries studied in the law, institutions, finance, and growth literature: Its legal and financial systems as well as institutions are all underdeveloped, but its economy has been growing at a very fast rate. More importantly, the growth in the Private Sector, where applicable legal and financial mechanisms are arguably poorer than those in the State and Listed sectors, is much faster than that of the other sectors. The system of alternative mechanisms and institutions plays an important role in supporting the growth in the Private Sector, and they are good substitutes for standard corporate governance mechanisms and financing channels. Despite its English commonl aw origin and British-style judicial system and democratic government, there is enough documented evidence to suggest that the effective level of investor protection and the quality of legal institutions in India are quite weak as well. Once again, this has evidently not prohibited growth. We find that to a large extent Indian firms conduct business outside the formal legal system and do not rely on formal financing channels from markets and banks for most of their financing needs. Instead, firms across the board, and in particular, small and medium firms, use non-legal methods based on reputation, trust and relationships to settle disputes and enforce contracts, and rely on alternative financing channels such as trade credits to finance their growth. The scope, methodologies, and results of our paper paint a more complete picture of the law-finance-growth nexus and how businesses and investors respond to the limitations of legal system and formal financial system than existing studies.

Inside the Black Box: Bank Credit Allocation in China’s Private Sector

Allen, Qian and Qian (2005, Journal of Financial Economics) explores the role of alternative financing channels (e.g., trade credits and private credit agencies) and governance mechanisms, such as those based on reputation and relationship, in explaining the growth of the private sector in China. We complement their study by examining how the Chinese state-owned banks allocate loans to private firms. We find that the banks extend loans to financially healthier and better-governed firms, which implies that the banks use commercial judgments in this segment of the market and are behaving more like their western counterparts. On top of this, however, we find that having a state minority ownership helps firms obtain bank loans, which suggest that political connections still play a role in gaining access to bank finance. In addition, we find that commercial judgments are important determinants of the lending decisions for manufacturing firms, large firms, and firms located in regions with a more developed banking sector; political connections are important for firms in service industries, large firms, and firms located in areas with a less developed banking sector.

Ownership, Institutions, and Capital Structure: Evidence from China

We employ a unique data set to explore the role of ownership structure and institutional development in debt financing of non-publicly traded Chinese firms. We show that state ownership is positively associated with leverage and firms' access to long-term debt, while foreign ownership is negatively associated with all measures of leverage. Surprisingly, firms in better developed regions are associated with reduced access to long-term debt, suggesting the availability of alternative financing channels and the tightening of the lending standards under the on-going banking reform. The combination of ownership structures and institutions explains up to six percent of the total variation in firms' leverage decisions, while firm characteristics alone explain no more than eight percent of the variation. Finally, we show that the negative effect of institutional development on firms' access to long-term debt is mitigated when the level of state or foreign ownership is high, and state ownership plays no role in foreign-controlled firms' access to long-term debt while its positive effect on access to long-term debt is strengthened for firms in well developed regions. Our evidence is consistent with state-owned banks' incentives to grant long-term loans only to state-owned firms in the absence of well-developed risk management.

Law, finance, and economic growth in China

China is an important counterexample to the findings in the law, institutions, finance, and growth literature: Neither its legal nor financial system is well developed, yet it has one of the fastest growing economies. While the law–finance–growth nexus applies to the State Sector and the Listed Sector, with arguably poorer applicable legal and financial mechanisms, the Private Sector grows much faster than the others and provides most of the economy's growth. The imbalance among the three sectors suggests that alternative financing channels and governance mechanisms, such as those based on reputation and relationships, support the growth of the Private Sector.