Geopolitical risk and firm’s informal financing: International evidence

Utilizing the substitution hypothesis and the economic model of trade credit as conceptual frameworks, we find that heightened geopolitical risk (GPR) correlates with an increase in firms’ access to informal financing (FAIF), accompanied by a decrease in supply of informal financing (FSIF) within an international context. Moreover, firms are net receivers of informal financing amid heightened GPR. These core findings persist even after controlling for other external uncertainties, using alternative proxies for firms’ informal financing decisions, applying a 1-year lag to GPR, and analysing a reduced sample. Furthermore, a firm’s nature of goods, the financing frictions, relationship-specific investments, internationalization level and a country’s creditor rights protection, financial openness and financial development levels play a significant role in the relationship between GPR and firms’ informal financing decisions. JEL Classification: F51, F34, G32, D81