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

Abstract

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.

Keywords:

• information asymmetry
• private certification
• signalling
• China
• company finance

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. For a comprehensive review, see Heras‐Saizarbitoria and Boiral (2013).

2. Further details on the sampling procedure are available from the ‘China 2012 Implementation Report’, downloadable from www.enterprisesurveys.org.

3. The questionnaire manual is downloadable from: http://microdata.worldbank.org/index.php/catalog/1559/related_materials. As an exhaustive list of all certifications obtained by sampled firms is not available, we cannot determine whether responses were in compliance with interviewer instructions in all cases. Were respondents, despite interviewer instructions, unclear as to which standards the question referred, this would introduce some noise into the variable.

4. For instance, Hazard Analysis and Critical Control Points (HACCP), the principles of which are also covered by ISO 22000 certification, though general, in that it applies to the process of food production, is more likely to be adopted by firms in the food industry. HACCP is also one of the certifications explicitly referenced in the survey’s questionnaire manual.

5. Numerous studies of Chinese firm financing emphasize the different lending environments in cities across China (e.g., Bai et al. 2006, Ayyagari et al. 2010, Ruan and Xiang 2013, Wang and Niu 2014). Considerable variation in access to finance across cities is also found in the present sample.

6. The exponentiation to odds ratios is computed using Stata’s logistic command.

7. Identification of this effect has been of interest to those evaluating the signalling effects of education in labour markets. See, for instance, Belman and Heywood (1997).

8. The parameter estimate (0.835) and standard error (0.070) on the interaction term are similar to those estimated via the fixed effects model, as seen in column 2, Table 2.