The fintech revolution: Exploring the potential of fintech finance in reducing corporate credit constraints

Abstract

This study investigates the role of fintech financing in alleviating firms' credit constraints across 66 developing and developed countries from 2013 to 2020. In this framework, we also examine various firm and country-level factors, including size, age, industry, ownership structure, financial development, bank competition, and the legal and institutional environment. Our findings indicate that fintech financing reduces investment-to-cash flow sensitivity, suggesting a decrease in financing constraints for firms. This effect is consistent across subcomponents of fintech financing, such as fintech lending and fintech capital raising. Furthermore, small, young, and private firms exhibit greater sensitivity of investment to cash flows. The impact of fintech financing is more pronounced for these entities. Additionally, financial development and a robust legal and institutional environment enhance the positive effects of fintech financing in mitigating firms' financing constraints. Moreover, firms in less competitive banking environments face more significant financing constraints, where fintech financing flourishes and exerts a more considerable impact. While fintech financing generally reduces firms' financing constraints, its effect is more prominent in developing countries. The results remain consistent when utilizing a direct measure of financial constraints and excluding countries with extreme fintech values. The analysis of transmission channels reveals that fintech lessens firms' credit constraints by reducing information asymmetry. The study discusses the implications of these findings for regulators, fintech firms, and small businesses.