Social capital and firms’ choice of financing under credit constraints: microeconomic evidence from Pakistan

Abstract

This study contributes to the literature by investigating the impact of credit constraints (CCs) on firms financing options using panel data of electrical fittings cluster over the period of two waves of survey 2008 and 2017. The analysis is based on probit, probit-random effect (RE), and recursive bivariate probit models. The study has employed comprehensive definitions of CCs and informal financing that cover supply- and demand-side factors of formal CCs as well as informal sources of financing. The parameter estimates on owner schooling, friends in the same industry, firm size and marketing channels are negative and statistically significant implying that these factors help to relax CCs. Our study also finds out that the CCs entrepreneurs prefer informal financing in the Sargodha cluster. Moreover, findings also reveal that social capital positively influences informal financing, whereas human capital has a negative effect on informal financing.