Signaling Value of Quality Certification: Financing Under Asymmetric Information

Abstract

In this paper, I examine the signaling value of internationally-recognized quality certification in improving firm’s access to finance for 39,638 mostly small and medium-sized firms in 137 countries. I find that certified firms have better access to external finance as compared to otherwise equal uncertified firms. Certified firms use more bank finance and equity capital while uncertified firms rely more on informal sources of finance. Quality certification helps firms to credibly signal their unobserved quality to creditors and investors, reduce informational asymmetry, and have better access to external finance. I also find that the signaling value of quality certification is stronger in presence of greater information asymmetry. Smaller firms and firms in less developed economies and financial systems benefit more from certification by gaining better access to external finance.