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The Relationship between Trust and a Firm’s Access to Financing: Evidence from Transitional Countries

Afandi, Elvin and Kermani, Majid (2012): The Relationship between Trust and a Firm’s Access to Financing: Evidence from Transitional Countries.

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Abstract

In our study we investigate the association between inter-organizational trust and access to financing for 11,500 firms across transitional countries (including Turkey). The results of our study contribute to the stream of economic development literature in two primary ways. First, we show that the degree of prepayment demanded by private sector firms from their customers tends to be a good measure of (dis)trust in business transactions. In transitional countries, whether or not a private firm demands prepayment for its sales is found to be a strong indicator of (dis)trust for its customers and/or a lack of confidence in the contract enforcement at the country level. Second, and most importantly, our econometric analyses suggest that enterprises in countries with high levels of inter-firm trust are more likely to obtain bank loans and less likely to report access to financing as a major obstacle to their businesses. This result remains robust with the inclusion of many controls and various specification checks as well as econometric adjustments for the potential endogeneity of trust and access to financing.

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