The capital constraint paradox in micro and small family and nonfamily firms
| DOI | https://doi.org/10.1108/JEPP-10-2015-0033 |
| Date | 11 April 2016 |
| Pages | 38-62 |
| Published date | 11 April 2016 |
| Author | Anders Bornhäll,Dan Johansson,Johanna Palmberg |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
The capital constraint paradox
in micro and small family and
nonfamily firms
Anders Bornhäll
HUI Research, Stockholm, Sweden;
Department of Economics, Dalarna University, Borlänge, Sweden and
Örebro University School of Business, Örebro, Sweden
Dan Johansson
Örebro University School of Business, Örebro, Sweden and
HUI Research, Stockholm, Sweden, and
Johanna Palmberg
Swedish Entrepreneurship Forum, Stockholm, Sweden and
CESIS, KTH Royal Institute of Technology,
Stockholm, Sweden
Abstract
Purpose –The purpose of this paper is to investigate the importance of the entrepreneur’s quest for
independence and control over the firm for governance and financing strategies with a special focus on
family firms and how they differ from nonfamily firms.
Design/methodology/approach –The analysis is based on 1,000 telephone interviews with
Swedish micro and small firms. The survey data are matched with firm-level data from the Bureau van
Dijks database ORBIS.
Findings –The analysis shows that independence is a prime motive for enterprises, statistically
significantly more so for family owners. Family owners are more prone to use either their own savings
or loans from family and are more reluctant to resort to external equity capital. Our results indicate a
potential “capital constraint paradox”; there might be an abundance of external capital while firm
growth is simultaneously constrained by a lack of internal funds.
Research limitations/implications –The main limitation is that the study is based on cross-
section data. Future studies could thus be based on longitudinal data.
Practical implications –The authors argue that policy makers must recognize independence and
control aversion as strong norms that guide entrepreneurial action and that micro- and small-firm
growth would profit more from lower personal and corporate income taxes compared to policy
schemes intended to increase the supply of external capital.
Originality/value –The paper offers new insights regarding the value of independence and how it
affects strategic decisions within the firm.
Keywords Tax policy, Family firms, Informal institutions, Ownership
Paper type Research paper
Journal of Entrepreneurship and
Public Policy
Vol. 5 No. 1, 2016
pp. 38-62
©Emerald Group Publishing Limited
2045-2101
DOI 10.1108/JEPP-10-2015-0033
Received 19 October 2015
Revised 1 February 2016
Accepted 2 February 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
JEL Classification —L210, G320, G340
The authors gratefully acknowledge the Confederation of Swedish Enterprise for financing the
survey. Financial support for Johanna Palmberg from the Smelink Foundation is gratefully
acknowledged. The authors are grateful for comments on earlier versions of the paper from Per-Olof
Bjuggren, Ana Castro, Niklas Rudholm, seminar participants at CESIS, KTH Royal Institute of
Technology, the Inaugural WINIR-conference in London, and Örebro University.
38
JEPP
5,1
1. Introduction
There is an extensive discussion of the idea that small-firm growth is hampered by a lack
of capital, which is expected to have significant economic and social costs (Abe, 2015;
Carpenter and Petersen, 2002; Didier et al., 2014; Gallo et al., 2004; Haynes et al., 1999).
Asymmetric information may make external investors more reluctant to supply capital to
smaller firms than to larger, morematurefirms(e.g.DeMassiset al., 2015; Hubbard, 1998;
Kon and Storey, 2003; Lee, 2014). Accordingly, various policy initiatives have been
implemented across the member countries of the European Union (EU) and the
Organization for Economic Cooperation and Development to facilitate access to external
finance by smaller firms, particularly firms that are potentially innovative and high growth
(Brown et al., 2014; European Commission, 2012; Mason and Brown, 2013; OECD, 2010).
However, previous studies have shown that small firms are characterized by
governance attributes that influence financing decisions and restrict the demand for
external capital (Davidsson, 1989; Gómez-Mejía et al., 2007; Romano et al., 2001)[1].
This observation is especially true of family firm owners, for whom the quest to remain
independent and maintain control over their firms often serves as a norm that
ultimately restricts financial and investment decisions (Blanco-Mazagatos et al., 2007;
Gallo et al., 2004). External investors presumably require influence over their
investments and thereby over firm governance. Thus, there may be a tradeoff between
independence and firm growth. Seizing a business opportunity and expanding a
business may require external funding, which might come at the cost of a loss of
control, causing the owner to refrain from growth.
The purpose of this paper is to obtain additional insight into financing decisions of
micro and small firms, particularly family firms. We investigate three related issues: is
independence a stronger motive for enterprise among family owners than nonfamily
owners? Is the control premium higher in family firms compared with nonfamily firms?
Do preferences toward internal and external capital differ in family vs nonfamily
firms?[2] The analysis is grounded in research that recognizes the fundamental role of
institutions in economic growth. These institutions are of both a formal and informal
character, and economic development benefits when such institutions are aligned and
conducive to productive entrepreneurship (Campbell, 2012). The idea underlying the
paper is that norms –an informal institution –may encourage family firms to value
independence to a greater degree than nonfamily businesses. Family firms thus exhibit
a lower demand for external capital and a higher preference for internal funds.
Our study is based on a representative sample of the total population of Swedish
private micro (1-9 employees) and small (10-49 employees) limited stock companies. Data
were gathered through 1,000 telephone interviews with controlling owners matched with
register data that enable us to distinguish family from nonfamily firms and to explore
differences between the two. In the survey (conducted in 2013) we asked questions that
allow for an investigation of the influence of family ownership on financial and investment
decisions, controlling for personal features of the owner (e.g. gender, education, and age),
firm characteristics (e.g. size, age, and industry affiliation) and capital structure
(e.g. gearing and profitability). The data from the survey is matched with firm-level data
from the comprehensive Bureau van Dijks database ORBIS. The combination of survey
and register data is well-suited for the purpose of this study since it enables us to account
for both owner attitudes and firm-specific characteristics in the empirical analysis.
Although previous research has examined motivational forces among busine ss
owners, control premiums, and attitudes toward internal and external capital, few
empirical investigations, using larger samples, have examined these issues with respect
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Capital
constraint
paradox
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