How does digital finance affect financing constraints of SMEs? Evidence from China

Based on the panel data of A-share listed companies on China's SME Board and the Science and Technology Innovation Board from the year 2011 to 2021, this article empirically examines the direct effect, internal mechanism and heterogeneous effects of digital finance on financing constraints of SMEs by using a two-way fixed-effects model. Results show that digital finance can significantly alleviate the financing constraints of SMEs through enhancing TFP, improving internal control and mitigating agency problem. Moreover, in areas with limited traditional financial resources, weak oversight, and high-tech industries, digital finance more effectively eases financing challenges. As financial development increasingly relies on digital technology, these findings can guide policy implications to resolve SME financing difficulties in the digital economy.