Finance and Firm Volatility: Evidence from Small Business Lending in China

Abstract

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.