1. Formal vs Informal Finance: Evidence from China by
Meghana Ayyagari, Asli Demirgus-Kunt, Vojislav Maksimovic
Discussant
Bernard Yeung
Stern
Mar 2007
2018/11/19

2. Interesting and important paper
First point:
China’s use of informal financing is just as extensive as other developing countries, e.g., Brazil, Africa, East European countries, Africa, South Asian
2018/11/19

3. Interesting and important paper
Second point: among all firms (2002 data), or just private firms (not SOE, listed firms):
Having bank financing is
positively and significantly associated with sales growth, percent profits reinvested, and,
not related with productivity
Self-financing (informal, family, other) is
Not related with sales growth,
Possibly negative related to reinvestment
Positively and significantly associated with productivity growth
Productivity is (sales – total material costs)/L
Control for
Endogeneity in treatment effects
City, size, firm type, age, competition
Contribution – Use large scale data to show that formal (bank) financing helps growth and reinvestment
2018/11/19

4. Comment on “endogeneity”
Correlation between getting loans and future profitability, a classic problem
Use a treatment effects model, Heckman correction (Inverse Mill’s Ratio)
2018/11/19

5. Endogeneity
Need an instrument to predict getting bank loans but not correlated with future performance
Collateral dummy as
= 1 if has a loan and put in a collateral
= 0 if has a loan, no collateral requirement,
no loan because can’t put in a collateral,
do not apply for a loan b/c no collateral.
The dummy captures the intersection of “requirement” for and “ability” to put in a collateral
Logic:
“Collateral serves as a proxy for the firm’s ability to post collateral. (so, can get a bank loan).
Whether there was a collateral requirement or not is less likely to be correlated with firm’s growth and hence need not enter the 2nd stage. Thus collateral serves as the identifying variable in our selection equation.”
Curiosity
That some are granted a bank loan but not required a collateral are possibly due to their expected future performance
But would that not make a part of the dummy correlated with future performance?
Feel weird to use ex post variable to as an ex ante “predictor”, but not very successful to pinning down what is ‘wrong”
Why not use “tangibility” as an instrument?
2018/11/19

6. Why the research is important?
Does finance matter?
Certainly
With finance, growth, no doubt
Why interested? Allocation efficiency is the key
Reinterpret
With bank loan, experiences sales growth, reinvest more, but, VA/L does not increase!
Meaning?
Self-financing, experiences little sales growth, little increase in reinvestment, but VA/L grows!
Efficient/Inefficient formal external financing?!
2018/11/19

7. Why banks are inefficient?
Corporate governance
Who own banks?
Managers are by political appointment
Lack of prudent judiciary duties
Connected lending (short termism in the G)
Opaque system
 corruption, NPL
Poor internal corporate governance
Credit officers want to lend!
My promotion vs. protecting other people’s money
Bank monitoring of borrower?
Go hard = face against connections
2018/11/19

8. Push Examine the efficiency of the system
Dig into the regions and cities and ask: where bank lending leads to better results?
Link the efficiency of bank financing with a region/city’s institutional environment?
Quality of the government
Quality of the regulations and supervision?
Quality of bank executives?
Bank’s credit policies – equity requirement, credit reports, etc
Loan officers’ incentive/agency problem?
2018/11/19

9. Still puzzled Recall the first point:
China’s use of informal financing is just as extensive as other developing countries, e.g., Brazil, Africa, East European countries, Africa, South Asian
But, efficiency?
Raise the puzzle: why is China growing so fast – even with its lousy capital markets?
Higher savings?
China’s capital allocation is a bit more efficient, at least in some major cities?
Using location level variables to shed light?
2018/11/19

10. Conclude
Interesting paper leading to interesting questions
2018/11/19