Signalling through the noise: private certification, information asymmetry and Chinese SMEs' access to finance

• Published in: Journal of Asian public policy Vol. 9; no. 3; pp. 243 - 256
• Main Author: Minard, Paul
• Format: Journal Article
• Language: English
• Published: Hong Kong Routledge 01-09-2016; Taylor & Francis Ltd
• Subjects: Asymmetry; Bank loans; Banking; Certification; China; company finance; Credit; Credit management; information asymmetry; Loans; private certification; signalling; Small & medium sized enterprises-SME; Studies; China
• ISSN: 1751-6234; 1751-6242
• DOI: 10.1080/17516234.2015.1083412

Information asymmetry between Chinese banks and small- and medium-sized domestic private enterprises (SMEs) is a source of credit constraints. This paper investigates whether obtaining an internationally recognized private certification standard can credibly signal unobserved firm quality, reducing information asymmetry and improving access to finance. Examining World Bank survey data, I find that firms that certified firms are 1.68 times as likely as comparable uncertified firms to receive bank loans. This effect is strongest among smaller firms, for whom information asymmetry is likely a more severe constraint. China's promotion of certification as a tool of regulatory policy has had the unintended consequence of mitigating policy shortcomings in another domain.