Finance and Firm Volatility: Evidence from Small Business Lending in China
2022 · Published in Management Science 68(3): 2226–2249 · DOI 10.1287/mnsc.2020.3942
PDF of Finance and Firm Volatility: Evidence from Small Business Lending in China
In one sentence
Access to FinTech credit on Alibaba’s platform makes small online businesses’ sales less volatile and makes them less likely to exit.
Summary
Alibaba’s online trading platform provides FinTech credit to millions of micro, small and medium-sized enterprises. Using daily sales data and an internal credit-score threshold that governs who receives credit, the paper applies a fuzzy regression discontinuity design to estimate the causal effect of credit access on firm volatility. Credit access significantly reduces sales volatility, especially for firms with fewer alternative sources of financing, and firms with FinTech credit are less likely to go bankrupt or exit later. Firms with credit invest more in advertising and in product and sector diversification, particularly during downturns, which are the channels through which credit reduces volatility.
Abstract as published
The online trading platform Alibaba provides financial technology (FinTech) credit for millions of micro, small, and medium-sized enterprises (MSMEs). Using a novel data set of daily sales and an internal credit score threshold that governs the allocation of credit, we apply a fuzzy regression discontinuity design (RDD) to explore the causal effect of credit access on firm volatility. We find that credit access significantly reduces firm sales volatility and that the effect is stronger for firms with fewer alternative sources of financing. We further look at firm exit probability and find that firms with access to FinTech credit are less likely to go bankrupt or exit the business in the future. Additional channel tests reveal that firms with FinTech credit invest more in advertising and product/sector diversification, particularly during business downturns, which serves as effective mechanisms through which credit access reduces firm volatility. Overall, our findings contribute to a better understanding of the role of FinTech credit in MSMEs.
Citation
Tao Chen, Yi Huang, Chen Lin, Zixia Sheng (2022). Finance and Firm Volatility: Evidence from Small Business Lending in China. Management Science, 68(3), 2226–2249. https://doi.org/10.1287/mnsc.2020.3942
BibTeX
@article{chen2022finance,
title = {{Finance and Firm Volatility: Evidence from Small Business Lending in China}},
author = {Tao Chen and Yi Huang and Chen Lin and Zixia Sheng},
journal = {Management Science},
year = {2022},
volume = {68},
number = {3},
pages = {2226--2249},
doi = {10.1287/mnsc.2020.3942}
}