Essays on firm performance, finance, and formality

This thesis examines the association between finance, formalisation, and firm performance for Vietnamese manufacturers. The first empirical analysis develops empirical studies of the finance-productivity relation, investigating the impact of financial constraints on productivity at the different points of productivity distribution. I apply quantile regressions and control for endogeneity problem arising from the implied relation by conducting the instrumental variables approach. The findings are as follows: (i) financial constraints have nonmonotonic distributional effects on productivity; particularly, financially constrained firms at the upper quantiles have the higher productivity than their unconstrained counterparts, while performers at bottom quantiles absorb negative effects of financial constraints; (ii) there is strong evidence of generating high internal funds in increasing productivity when firms are financially constrained; such positive effect appears stronger for firms at higher quantiles. The second analysis explores the relationship between leverage and technical efficiency across firm size and formality status. I find that smaller firms—regardless of formality status—experienced higher efficiency gains from increased leverage than larger firms. However, the nature of leverage matters with formal and short-term financing playing a crucial role in improving technical efficiency amongst small firms. Further extension of the analysis shows that the way in which firms possess property rights helps shape the leverage-efficiency link across different types of firms. These findings uphold the access to formal finance for smallest firms, including informal firms, as a likely mainstay of efficient resource allocation in the developing economy. The third analysis studies the effect of the reform that streamlined formalisation process on increased formal and/or informal financing of Vietnamese micro-firms. The difference-in-differences estimations identify the heterogeneity of the associated impact by firm age. The reform increased the propensity to use informal debt for young registered firms by 18.2 percentage points relative to those remaining informal, likely in the form of using informal finance only. The reform, under strong local governance, offered advantages for young firms in using formal finance only. Older counterparts continued to benefit from more access to formal finance with a resultant reduction in informal finance after the reform. The findings question whether access to formal financing is an ostensible benefit of formalisation for many young informal firms and whether the formalisation change in the real sector could provide an additional impetus for more flexibility in formal financial markets.