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Choice of Financing in Family Firms Master Thesis- 30 Credits

Paper within: Master Thesis in Business Administration

Author: Ashkan Mohamadi

Supervisor: Francesco Chirico

Jönköping December 2012

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Acknowledgements

I take this opportunity to show my deep gratitude and profoundrespects to my

supervisor Francesco Chirico for his constant encouragement and guidance throughout

this assignment. In addition I am obliged to the companies which answered the

questionnaire for the valuable information provided by them. I also take this

opportunity to thankalmighty my parents and my friends, especially my mother and my

uncle, for their support and encouragement without which completion of this thesis

would not be possible.

Ashkan Mohamadi

Jönköping International Business School, November 2012

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Summary

Family Businesses build up a large proportion of businesses all around the world.

Scholars, therefore, put much effort to study family firms. One common fact on

which many scholars agree is the important role of non-economic factors in decision

making processes in family firms. A theory called socioemotional wealth is

developed to explain the role of non-economic factors in family firms. It suggests

that the main goal of family firm, rather than maximizing shareholders’ value, is to

preserve their socioemotional wealth. Socioemotional wealth can be in forms of

control, identity, social relations, emotions, or passing the company to the next

generations. Due to the importance of these non-financial factors in family firms,

their decision making process can be different than that of non-family firms.

Financing activities is one of the essential decisions in the business.

The goal of this research is to find out if there is difference between choices of

financing in family and non-family firms. In order to do that a questionnaire is

designed and sent to Swedish companies. 171 companies, 73 of which are family

firms, replied to the online questionnaire. Four regression models are designed to

examine the difference in preference over 11 different sources of financing between

family and non-family firms. Using the regression models and interaction graphs,

moderating effects of firm size and firm age are also investigated.

Result shows that family firms are different in choosing internal sources of financing

and debt. They prefer those financing sources more than non-family firms. Result on

external sources of financing in comparisoncannot be generalized for all external

sources. Moderating effect of firm age is in a same position, which means although it

is supported for some sources, for others the result is not significant. Additionally

Resultdoes not support the hypothesis about moderating effect of firm size on the

relationship between being a family firm and use of different sources of financing.

Key words: family firm, family business, socioemotional wealth, internal source of

financing, external source of financing, debt, firm size, firm age

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Contents

1.Introduction .......................................................................................................................................................... 1

1.1. Background .................................................................................................................................................... 1

1.2. Problem ........................................................................................................................................................... 3

1.3. Purpose ............................................................................................................................................................ 4

1.4. Delimitation ................................................................................................................................................... 4

1.5. Definitions ...................................................................................................................................................... 5

1.6. Disposition ..................................................................................................................................................... 6

2. Theoretical Framework ................................................................................................................................ 8

2.1. Family Business............................................................................................................................................ 8

2.2. Socioemotional Wealth and Financing Decisions ....................................................................... 13

2.3. General Financing Issues ....................................................................................................................... 17

2.4. Research Hypotheses .............................................................................................................................. 20

3. Methodology ..................................................................................................................................................... 27

3.1. Research Approach .................................................................................................................................. 27

3.2. Data Collection ........................................................................................................................................... 28

3.3. The Questionnaire .................................................................................................................................... 29

3.4. Data Analysis .............................................................................................................................................. 30

3.5. Validity and Reliability ........................................................................................................................... 33

4. Result .................................................................................................................................................................... 35

4.1. Descriptive Analysis and Correlations............................................................................................. 35

4.2. Internal Sources of Financing .............................................................................................................. 37

4.3. Debt ................................................................................................................................................................ 40

4.4. External Sources of Financing ............................................................................................................. 41

4.5. Moderating Effect of Firm Size ............................................................................................................ 43

4.6. Moderating Effect of Firm Age ............................................................................................................ 45

5. Discussion .......................................................................................................................................................... 48

5.1. Conclusion ................................................................................................................................................... 48

5.2. Discussions .................................................................................................................................................. 50

5.3. Contribution ............................................................................................................................................... 54

5.4. Limitations .................................................................................................................................................. 56

5.5. Future Research ........................................................................................................................................ 58

References .............................................................................................................................................................. 60

Appendices ............................................................................................................................................................. 64

Appendix 1: The Questionnaire .................................................................................................................. 64

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1. Introduction

1.1. Background

Family businesses are one of the most common forms of business in the world. Their

role in economies of nations including both developed and developing countries is

undeniable. Many of the existing companies have started as a family business at the

beginning. Because of their importance, in academia many authors have studied

family firms. Still the study of family firms is at its early stage and scholars are

investigating and finding new aspects of it (Miner, 2010). Family businesses are

worth being studied in particular since they act sometimes differently than non-

family businesses. So in the literature on family firms, topicsother than general

business issuesare investigated.

Many studies have shown that there are some differences between family

businesses and non-family businesses (Aronoff, Astrachan, & Ward, 2002; Bertrand

& Schoar, 2006; Chrisman, Chua, Pearson, & Barnett, 2012). Unlike other kindsof

business, a family business is operated by members of a family. This causes the

decisions made in the business to be affected by family norms and culture (Bertrand

& Schoar, 2006). Poza (2004) for example claims that family businesses do not want

to give up control of the business. As a more precise example, by mentioning the

cultural beliefs in the family businesses Bertrand and Schoar (2006) stated that

legacy may instill the desire to insure the family control and survival at all cost. This

is an example of what Chrisman et al. (2012) called family centered non-economic

goals. To make it more clear, sometimes in the family businesses the decisions are

not made based on the economic goals. They are instead based on non-economic

goals which include family culture and beliefs.

Since non-economic goals play an important role in the case of family businesses,

their behavior is to some extent different than other types of business. One of the

behaviors is their choice of financing and the structure of their capital. Romano,

Tanewski, and Smyrnios (2001) have done a research to see how some of the

differences in the family businesses make different in their capital structure. They

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checked family firms’ choice of financing based on the size of the firm; age of it;

industry; age of the CEO; family control; and business planning.

Capital structure is an issue in any kind of business. The classic definition of capital

structure is the ratio of debt and equity in the total value of a firm (Bodie, Kane &

Marcus, 2004). Debt increases the leverage while it is theoretically less expensive

than equity. By increasing leverage, debt increases financial risk of firm. Debt

usually doesn’t lead to involvement of external financiers. Equity on the other hand,

if it is funded by non-family sources, leads to the involvement of the external

financiers. However, equity has some advantages as reducing the risk and

availability of outside advice (Smith, Smith, & Bliss, 2011; Bodie et al, 2004). The

general theory which explains how firms decide on their capital structure is

explained by the optimization of Net Present Value (NPV) and Weighted Average

Cost of Capital (WACC). In general, theoretically individuals’ behavior is explained

by their effort to maximize their gained value and at the same time to reduce the

risk they face (Preve & Sarria-Allende, 2010). Beside that general theory, scholars

have discussed the issue in more detail. Smith et al. (2011) for example stated that

firms’ decision on the source of financing depends on issues like stage of growth of

firm, urgency of the financial need, and amount of it. Smith et al. (2011) also make a

list of different sources of financing, and then they make a model in which they

relate each of the sources to situation of the firm. For example if the firm is in its

early growth stage, the need is not urgent, and the amount is small, firm will

probably go for existing shareholders, friends and family, and angel investors as

equity funding and for boot-strapping and government programs as debt financing.

Some of the listed sources of financing in different entrepreneurial finance books

including that of Smith et al. (2011) cause involvement of the external financiers.

Those include angel investors, venture capitalist firms and public offering. There are

in contrast some internal sources of financing such as unpaid dividends which do

not lead to involvement of outside investors. As discussed earlier, debt including

asset based lending and many forms of the commercial bank lending usually does

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not lead to loss of control of the business in most of the time. Equity on the other

hand, if it is financed by an external source causes to lose some of the control over

the firm because the financiers want to make sure they will have the best

compensation by the best possible management. So they monitor the firm and give

advice to it (Smith et al., 2011). There are however some kinds of equity which do

not necessarily lead to involvement of other parties. Family, boot-strapping, and

current shareholders are the examples.

To sum up, due to the different attitude of the family firms from non-family ones,

they have some non-economic goals which cause their behavior to differ from non-

family businesses (Chrisman et al., 2012). One of their important attitudes is to

insure the family control over the firm (Poza, 2004; Romano et al., 2001; Bertrand &

Schoar, 2006). This can impact their choice of financing for example, since some of

the sources of financing take the control from the current owners (Smith et al.,

2011).

1.2. Problem

There are some differences in decision making process of family firms and non-

family firms. For example many scholars mentioned that the family businesses

intend to keep the control of the firm within their family (Poza, 2004; Romano et al.,

2001; Bertrand & Schoar, 2006). Though the other types of business might have

such intention as keeping the control with the entrepreneur, the stronger role of

culture and the norms and non-economic goals can make the family businesses

more eager to keep the business within the family (Zellweger, Nason, & Nordqvist,

2011a). If so, it can be expected that family businesses intend not to finance their

needs by sources which lower their control over the business. In other words,

ceteris paribus, if we compare two similar firms one of which is a family business

and the other one is not, the family business has less willing to share their equities.

Based on other characteristics of family businesses also, there could be other

differences in financing activities of family firms. This issue is worth being

investigated and examined more. It is indeed worth seeing whether

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evidencesupportsdifferent choice of financing in family firms. In fact studying how

different family and non-family firms are in case of financing can support or weaken

previous studies on family firms.To put another way there can be some

contributions as empirical studies to examine the existing theories about family

firms. Especially in recent years new theories are developed to discuss the decision

making processes in family firms. Also for financing choices in family firms there are

opposite arguments in the literature. So putting more effort to recognize the real

relationship between different factors in financing decisions of family firms can be

valuable.

1.3. Purpose

As an empirical study this paper intends to find out the potential difference in

financing choices in family firms and non-family ones. The data however will be

gathered only from Swedish family and non-family firms. In other words,

investigating businesses in Sweden, this paper attempts to find how different family

firms choose each of common sources of financing. To do this, primary data is

collected by the mean of questionnaires which are sent to different businesses in

Sweden. Conducting a quantitative research, by analyzing their answers to the

questionnaires, the purpose is to find how important each of sources of financing is

to family and non-family firms. Based on the result, it can be concluded if family and

non-family firms are different in choosing source of financing. Also different

theories in family firms can be supported or weakened by the result of this paper. In

summarythis paper attempts to answer the following question:

Do family firms differ in their choice of sources of financing compared to non-family

firms?

1.4. Delimitation

The goal of this research is to find out if there is a difference between choice of

financing in family and non-family firms. Additionally if the difference exists, this

paper attempts to find out why it does. This paper, on the other hand, does not

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investigate the process of family firms’ decision making in case of financing. It is a

quantitative research which seeks the difference and some factors affecting it. It is

not a qualitative research which asks family businesses directly on how they decide

on their choice of financing. As a result it is not about how family firm owners think

step by step to choose their choice of financing.

1.5. Definitions

Family Firm:There are many definitions for family firms. Generally a family firm is

a business in which one or more families are the owners and/or the managers. In

this paper a family firm is referred to as a business “in which two or more extended

family members influence the direction of the business through the exercise of

kinship ties, management roles, or ownership rights” (Chua et al., 1999, p. 21).

Capital Structure:Capital Structure is the mixture of debt and equity used in a

company to finance its activities (Clayman et al., 2012). If V represents value of a

company, D represents its debt, and E stands for its equity, the following statements

are used to present capital structure of a firm:

D + E = V

𝐷

𝑉+

𝐸

𝑉= 1

Pecking Order Hypothesis:Pecking order hypothesis (Romano et al., 2001; Zhang

et al., 2012; Tappeiner et al., 2012) suggests that firms are likely to finance their

activities firstly by internally generated funds. They prefer debt after the internal

financing and only then, they go for private equity.

Figure 1.1. Pecking Order Hypothesis

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Socioemotional Wealth:Socioemotional Wealth is a new concept mainly discussed

by Gómez-Mejía et al. (2007). Socioemotional Wealth refers to non-financial wealth

of family firms preserving which is the main goal of them. Socioemotional Wealth is

“non-financial aspect of the firm that meets the family’s affected needs such as

identity, the ability to exercise family influence, and the perpetuation of the family

dynasty” (Gómez-Mejía et al., 2007, p. 106).

Family Business Triangle:Sometimes some conflicts exist among the owners of a

family firm. The conflicts are about selling a part of company to the outsiders in

order to be able to raise capital and stay competitive in the market place. On the

other hand some of the owners do not want to re-invest in the company and just

want their dividends and liquidity. What impacts these decisions is the family’s

concern about keeping control of the firm within family members. The relationship

among capital, liquidity, and control is referred to as Family Business Triangle (de

Visscher et al., 2011).

Figure 1.2. Family Business Triangle

Patient Capital:Patient capital is defined as “equity provided by family owners who

are willing to balance the current return on their business investments with merits

of a well-crafted, long-term strategy and continuation of the family tradition and

heritage” (de Visscher et al., 2011, p. 16).

External Financing

Debt

Intenal Financing

Control

LiquidityCapital

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1.6. Disposition

Introduction: In this chapter a background on family businesses, their difference to

non-family firms, general issues on how firms decide on their financing sources, and

the potential difference of family firms on this issue is discussed. Then based on the

background the problem and purpose on this research is presented. Definition of

key terms and a disposition is presented after stating the delimitation of this study.

Theoretical Framework: Different theories by different authors are presented and

structured in the theoretical framework chapter. They are structured in a way that

the research hypotheses can be generated in order to find the potential differences

in choice of financing of family and non-family businesses. Lastly the hypotheses are

stated.

Research Methods:This section presents how this research is done. In detail, how

the sample in chosen, how the data is gathered, how the data is analyzed, and how

trustable the results are, are discussed in the research methods chapter.

Result: The result of the empirical study, i.e. the regressions on the data gathered

from the questionnaire, is presented in this section. The result is shown by different

tables and graphs for different models used to analyze the data.

Conclusion:The conclusion is made based on the result. If the result is not in

accordance with the research hypotheses, the possible reasons are discussed in this

section. The reasons might include the limitations of this study which also are

presented in conclusion section. For the result which supports the hypotheses, the

relevant theory behind the hypothesis is claimed to be supported. Some suggestions

are also made for future research on the topic of this research based on what is

found interesting, important, and limiting.

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2. Theoretical Framework

2.1. Family Business

Studying family businesses is to some extent different from non-family businesses

(Craig & Salvato, 2012; Gómez-Mejía, Haynes, Núñez-Nickel, Jacobson & Moyano-

Fuentes, 2007). One reason for the difference is that family businesses involve

families which in turn have their own characteristics. In other words, families have

special behaviors which cannot be seen in other institutions. Family and business

are two different types of social organizations (Zellweger et al. 2011a). To study the

two different organizations together, a new set of theories and research would be

required (Miner, 2010).The fact that family business consists of family and

corporation makes the field to be diverse. In other words, family business research

is positioned in the boundaries of different fields.It involves Economics,

Management, Psychology, Sociology, etc. (Craig & Salvato, 2012). There are many

studies merely on business. There are, on the other hand, a lot of theories on family

behavior. However, studying family business can make creative perspectives to view

the phenomena (James, Jennings & Breitkreuz, 2012; Miner, 2010). For example in

classical study of business many of the behaviors are explained by maximization of

shareholders’ value (Miner, 2010); while in studying family businesses behavioral

theories are mostly used (Chrisman et al., 2012; Berrone et al., 2012; Chua,

Chrisman, & Sharma, 1999); though Astrachan and Jaskiewicz (2008) suggest that

the general term of maximization of utility function in Economics can be a general

theory to explain all the institutions. In this case the utility function can consist of

financial and non-financial interests such as emotional joy or psychological

gratification. However behavioral theories are widely used in family business

research (Chrisman et al., 2012;Berrone, Cruz & Gomez-Mejia, 2012). Based on

behavioral theories Chrisman et al.(2012)note that rather than a single financial

goal, family businesses have diverse set of goals which include family centered non-

economic goals. Gómez-Mejía et al.(2007) present a developed version of behavioral

theories called socioemotional wealth. To Gómez-Mejía et al.(2007) the main goal of

family firms is to maintain the socioemotional wealth. They define socioemotional

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wealth as “non-financial aspect of the firm that meets the family’s affected needs

such as identity, the ability to exercise family influence, and the perpetuation of the

family dynasty” (Gómez-Mejía et al., 2007, p. 106). However, the term of

socioemotional wealth is developed further by Berrone et al. (2012). The

explanation of the developed version of socioemotional wealth is discussed later in

this chapter. In generalfamily business literaturesuggests that family members are

emotionally involved in the business rather than only thinking about the financial

outcomes (Craig & Salvato, 2012; Gómez-Mejía et al., 2007; Astrachan & Jaskiewicz,

2008).

Considering behavioral theories, the family entrepreneurs are seen as humans with

all the feelings, emotions, and passions (Craig & Salvato, 2012). For

example,socioemotional wealth of Gómez-Mejía et al. (2007) can be in form of

satisfaction of needs of affect, intimacy, and belonging. Mentioning the importance

of emotions, Astrachan and Jaskiewicz (2008) formulate a model to assess the value

of family firms. In the model, they included emotional returns and emotional costs.

Emotional returns can be warmth, love, tenderness, happiness, consolation, etc.

(Berrone et al., 2012). Emotional costs including anger, sadness, fear, loneliness,

anxiety, disappointment (Berrone et al., 2012) can be a result of family conflicts,

stress, and rivalry (Astrachan & Jaskiewicz, 2008). Stamm (2012) discuss the term

of psychological ownership in the family businesses. In this regard, Stamm (2012)

suggests that there is an emotional perspective on family business ownership which

in fact gives identity to the family (Stamm, 2012). Family members in the family firm

not only own the business legally, but they store part of themselves in the business

(Stamm, 2012).

The role of self-identity in family firms plays an important role in their behavior

(Gómez-Mejía et al., 2007). Identification is defined as the way self-conception and

the social categories to which people perceive themselves to belong (Gómez-Mejía

et al., 2007). Gómez-Mejía et al. (2007) also present the term of organizational

identification for family businesses. They claim that people would have a deep

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psychological gratification when their beliefs about their organizations become self-

defining or self-referral. Maybe that’s why family firms tend to keep the control of

the corporation within the family (Berrone et al., 2012; Gómez-Mejía et al., 2007).

According to Gómez-Mejía et al. (2007) because of socioemotional wealth family

firms try to maintain family control and exercise authority even if it means avoiding

a better performance. For example, Sirmon and Hitt (2003) claim that family

businesses don’t have access to some main sources of financing which is available to

non-family firm due to the fact that families don’t want to share their equity.

Maintaining the family control applies to long term perspectives also. In other

words, to preserve socioemotional wealth or the family identity, family is likely to

keep and successfully run the firm in the future.

Family’s attitude towards the survival of firm is like protecting the family’s identity.

Discussing this, Poza(2010)suggest that while managing a family firm, the managers

should be totally aware of the long term ownership perspective of family members

towards their business. According to Gómez-Mejía et al. (2007) socioemotional

wealth can be in form of the perpetuation of family values and the preservation of

family dynasty. The long term perspective causes some different behaviors in family

firms. Difference in financing activities is one example. According to Sirmon and Hitt

(2003), the long term perspective can impact the financial activities in family firms.

They have an effective financial structure in order to be able to perpetuate the

business for future. This causes patient capital presented by Sirmon and Hitt (2003).

Patient capital, which is one of the capitals available to family businesses, is defined

as the capital invested without the threat of long term liquidation (Sirmon & Hitt,

2003). Since U.S. financial markets are not structured for these kinds of financing,

patient capital could be a source of advantage for family firms (Sirmon & Hitt, 2003).

Patient capital is not the only resource available to family firms. Businesses which

arerun by family members provide a combination of resources which might not be

available to non-family businesses. In this regard, Craig and Salvato (2012) state

that one of the main distinctions between the family and non-family businesses is

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the resource management possibilities. There are some resources in the family that

can be available to a potential business. These resources are called family capital in

the literature (Sorenson & Bierman, 2009). Family capital can be in the forms of

social, human, or financial capital.Sirmon and Hitt (2003)name patient capital and

survivability capital instead of financial capital.As Sorenson and Bierman (2009)

show human and financial family capital can be hired or imported into non-family

businesses. In fact social family capital is what makes family business different.

Social capital is available only to families because there are unique relationships

within family members that cannot be easily reproduced elsewhere. The

relationships for example make trust within the business. Open dialogue is another

example. The family members can discuss the business issues during lunch for

instance. A related issue about the specific relationships within family is structure of

the family. In factCraig and Salvato (2012)claim that one of the differences between

family and non-family business research is the context and structure of the family

firms. Studying the role of structure in family firms,James et al. (2012) applied two

theories from family studies: structural functionalism and symbolic

interactionism.Structural functionalism refers to the fact that families are units of

the societywhile the interactions within the family can identify the role of family in

the society. Symbolic interactionism, on the other hand, explains how relationships

and roles in the family shape the identities of individuals in the family. During the

process of shaping identities, values are affected and the behavior will be in

consistent with values and identities(James et al., 2012). These family related

theories can explain some of the behaviors of family firms by explaining the

relationships and interactions within family.

Although these emotions, identities, and relationships exist in non-family businesses

as well, they are strong enough in family businesses to make the family firms

different from non-family firms (Berrone et al., 2012). Making a same point,

Chrisman et al. (2012) stated that the social affiliated goals, solidarity, and social

values (Miner, 2010; Gómez-Mejía et al., 2007) may be what differentiate family and

non-family firms.

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A relevant theory that can sum up all the above mentioned points is socioemotional

wealth theory of Gómez-Mejía et al.(2007). There are two reasons for stating

socioemotional wealth theory. First, as Berrone et al. (2012) mentioned, it is based

on widely-used (Chua et al., 1999; Chrisman et al., 2012) behavioral theories. That

means, in explaining family firm behaviors, non-financial goals should be considered.

However, socioemotional theory suggests that there is only one goal for family firms,

which is preserving family’s socioemotional wealth (Gómez-Mejía et al., 2007).

Second, it is comprehensive enough to consist all of the points made earlier in this

paper. Berrone et al. (2012) define five dimensions for socioemotional wealth which

can be represented in word FIBER. According to Berrone et al. (2012) F stands for

family control and influence. As mentioned earlier families are likely to keep the

control and authority of strategic decisions within the family (Gómez-Mejía et al.,

2007; Sirmon & Hitt, 2003). The control can be direct by a family CEO for instance or

indirect by presenting in top management team (Berrone et al., 2012).de Visscher,

Aronoff, and Ward (2011) divide control into two types: management control and

ownership control. In Berrone et al. (2012)’s model, I stands for identification. As

discussed earlier identification and preserving it in the family can alter the way in

which family firms act. To give an example, a family’s image about themselves can

be to treat the employees very well. This might lead not to firing employees in

economic recessions even if it is financially beneficial or legally allowed. This

behavior is explained by socioemotional wealth as the family wants to preserve its

identification which is one dimension of socioemotional wealth. B means bonding

social ties. In this case the socioemotional wealth theory is related to social family

capital. According to Berrone et al. (2012) social ties can be internal or external.

Internal social ties refer to the relationships inside the family while the external ties

are relationships with outsiders like partners, customers, etc. Binding social ties can

fulfill people’s need for social relations, closeness, and interpersonal solidarity

(Berrone et al., 2012). E in FIBER refers to emotional attachment. Emotional

attachment is defined as “psychological appropriation of the firm by the family in

order to maintain a positive self-concept” (Berrone et al., 2012, p. 6).However, the

feeling and emotions, as presented by Astrachan and Jaskiewicz (2008) as emotional

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returns and emotional costs, can be negative or positive. The last letter of R stands

for renewal and dynasty succession. The long term perspective of the family firms

and the impact of that perspective on family firm’s behavior exist due to this

dimension of socioemotional wealth.

2.2. Socioemotional Wealth and Financing Decisions

Each of the five dimensions of socioemotional wealth can have impact on financing

decisions of family firms. Generally according to Zhang, Venus and Wang (2012)

family firms do not behave the same as others in case of choice of financing. The first

dimension of socioemotional wealth, control, is one of the most influential reasons.

In almost every research on financing decisions in family firms desire to keep

control over the firm is stated as a significant factor (Romano et al., 2001; Sirmon &

Hitt, 2003, de Visscher et al., 2011; Zhang et al., 2012; Tappeiner, Howorth,

Achleitner, & Schraml, 2012; Wu, Chua & Chrisman, 2007). In other words, in

making financing choices families are likely to keep the control of firm within family.

Zellweger et al. (2011b) argue that without control, families cannot have the other

aspects of socioemotional wealth. Control and influence are what gives the family

emotional attachments and the organizational identity (Zellweger & Astrachan,

2008). In their model on capital structure of family firms, Romano et al.

(2001)present the desire to keep family control as one of independent variables;

which shows the importance of the issue in the model. Control allows families to

pursue their interest inside the business (Zellweger et al., 2011b). Zellweger et al.

(2011b) state that control in present and future is one of the most important issues

for firms. They also argue that the longer the family has control over the business,

the more emotional ties it has over the firm. As time goes by, family feels more

attachment to the business. Preserving the extent of control can impact the actions,

such as financial ones,made by family firms (Romano et al., 2001). Berrone et al.

(2012)report some existing empirical findings to show how maintaining control can

impact the decisions in family firms. They mention how it can make the family

businesses to take lower financial risk, change management structure of company,

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make the families to less diversify their business activities especially to high

technology industries, and have more attention on environmental issues.Maybe the

most important impact of desire to keep control is the conservative financing

strategies by family firms (Zhang et al., 2012). Family firms “avoid becoming

dependent on outside creditors or shareholders who might thereafter to remove

ownership and control” (Zhang et al., 2012, p. 98). Zhang et al. (2012) also argue

that keeping control and ownership as the most important objective for family firms

prevent them to use venture capital and equity financing. Even if there is a fear that

debt can lead to loss of control, family firms are likely to have lower level of debt

(Zhang et al., 2012).Otherwise if debt is less control taking than equity financing,

family firms prefer debt (Croci, Doukas & Gonenc, 2011). In addition, intend for

internal financing is much higher than external financing in family firms for the

same reason (Zhang et al., 2012; Tappeiner et al., 2012).The preference order of

internal financing, debt, and equity is known as Pecking Order Hypothesis in the

literature (Zhang et al., 2012; Tappeiner et al., 2012; Croci et al., 2011). Although

Pecking Order Hypothesis is defined for any firm, in family firms it is argued to be in

different extent (Tappeiner et al., 2012).In another model called Family Business

Triangle which explains the financial issues in the family businesses, one of the

dimensions is control (Dreux IV, 1990; de Visscher et al., 2011).De Visscher et al.

(2011) explain how family firms need to balance their capital and liquidity needs in

order to keep the control inside the family. In fact, control, liquidity and capital are

the three dimensions of Family Business Triangle (Dreux IV, 1990; de Visscher et al.,

2011). Zellweger et al. (2011b) on the other hand, present three aspects of control:

the extent of family control over the firm; the duration of control; and the

transgenerational control. They show that the most important aspect of control is

the third aspect which is transgenerational control. Usually families have desire to

pass on the control over the business to the next generations.

Family firms try to pass the firm to the next generations (Berrone et al., 2012; de

Visscher et al., 2011). Control and succession are not only important to the purposes

of this paper, but according to Zellweger et al. (2011b) they are the core of

15 | P a g e

socioemotional wealth concept. Transgenerational control is one of the reasons for

the long term perspective of family businesses. “A feature of many family firms is

the intention to pass on the business to successive generations, [which is] an

aspiration that requires long term perspective” (Lumpkin & Brigham, 2011, p. 1149).

Intentions to maintain transgenerational control is such important that some

scholars consider it as main distinguishing feature of family firms (Zellweger et al.,

2011b; Lumpkin & Brigham, 2011; Zellweger et al., 2011a). Scholars (Dreux IV,

1990; Zellweger et al., 2011a; Sirmon & Hitt, 2003; Lumpkin & Brigham, 2011)

investigate the role of long term perspective in decision making process in family

firms. Introducing the term of Long Term Orientation, Lumpkin, and Brigham (2011)

define three dimensions for it: futurity, continuity, and perseverance. They explain

futurity to be look to the future, continuity to be the bridge from past to future, and

perseverance to be decisions in present which affect future. Families count on future

and succeeding generation’s benefits as part of their socioemotional wealth

(Berrone et al., 2012; Zellweger et al., 2011b). As a result, due to their longer

horizons, family firms sometimes make some decisions such as financial investment

that other companies would avoid (Lumpkin & Brigham, 2011).So, as Sirmon and

Hitt (2003) state their financing choices are different from non-family firms. Sirmon

and Hitt (2003) argue that the positive aspect of financing family firms is the patient

capital. As mentioned earlier, family’s intention for the long term outcomes rather

than short term outcomes, which are considered more in non-family firms, there is

an effective way of managing financial resources in family firms. This effective way

of managing financial capital is coincided with patient capital (Sirmon & Hitt, 2003).

Patient capital is a key advantage of family firms (de Visscher et al., 2011). In

addition to the earlier definition, de Visscher et al. (2011, p. 16) define patient

capital as “equity provided by family owners who are willing to balance the current

return on their business investments with merits of a well-crafted, long-term

strategy and continuation of the family tradition and heritage”. According to de

Visscher et al. (2011) some of patient capital attributes are: stability of capital

structure, presence of family values in the organizations, tangible and intangible

return on equity, increasing cost of patient capital as company passes to the next

16 | P a g e

generation, etc. Family firms, in fact, avoid certain short term gains in order to attain

solid long term growth (de Visscher et al., 2011). As a result they can access to low

cost capital. De Visscher et al. (2011) develop a model to show how family firms

have less expensive capital. In their model cost of patient capital is a function of both

financial elements and an element called ‘Family Effect’. In fact there is a negative

relationship between cost of patient capital and family effect. De Visscher et al.

(2011, p. 31) define family effect as “family members’ level of satisfaction and

confidence in, and dedicated and commitment to the business”. They argue that by

each generation the level of family effect decreases and patient capital would cost

more.

There are few papers investigating the role of other dimensions of socioemotional

wealth (emotions, social ties, identity) on financing choices of family businesses.

One of those few works is done by Chua, Chrisman, Kellermanns, and Wue (2009).

Chua et al. (2009) examine the role of social capital on cost of financing for family

firms. They argue that the social capital and relationships can reduce the borrower-

lender agency problems. They mention the role of other socioemotional dimensions

as well. For example feelings such as altruism cause family members to support

each other strongly when each of them is in trouble. Knowing that, creditors charge

less when they lend to family firms. Identity related issues also can impact financing

in family businesses. In that regard, family firms have intention to keep their

reputation. As a result they avoid financially risky projects (Croci et al., 2011;

Anderson, Mansi & Reeb, 2003; Chua et al., 2009).Although they are usually

undiversified (Croci et al., 2011; Berrone et al., 2012; Anderson et al., 2003), family

firms are less risky because of their caution about their reputation (Croci et al., 2011;

Anderson et al., 2003). That is in fact another reason for reducing the agency cost for

family firms. Usually there is a conflict between shareholders and creditors. While

shareholders intend to invest in high risk high return project, bond holders don’t

want to pay for the failure. Bond holders prefer low risk low return investments

(Anderson et al., 2003; Croci et al., 2011; Romano et al., 2001). However in case of

17 | P a g e

family firms, since intrinsically they avoid risky project, the agency cost of

borrowing decreases. As a result they will have less expensive debt available.

Figure 2.1 is presented as a summary of theoretical reasoning for the different

process of financing decisions in family firms.

Figure 2.1. Theoretical Reasoning

Utility maximization

(Astrachan & Jaskiewicz,

2008)

Behavioral theories

(Chrisman et al., 2012;

Berrone et al., 2012; Chua

et al., 1999)

Emotional value

(Zellweger et al., 2011b;

Astrachan & Jaskiewicz,

2008)

Socioemotional wealth

(Gómez-Mejía et al., 2007;

Berrone et al., 2012)

etc.

Control

(Zellweger et al., 2011b;

Gómez-Mejía et al., 2007)

Identity

(Gómez-Mejía et al., 2007;

Berrone et al., 2012)

Social relations

(Sorenson & Bierman,

2009; James et al., 2012)

Emotional ties

(Stamm, 2012; Astrachan

& Jaskiewicz, 2008;

Zellweger & Astrachan,

2008)

Succession

(Lumpkin & Brigham,

2011; Zellweger et al.,

2011b)

Comparing to non-

family firms, family

firms decide

differently in case of

financing

2.3. General Financing Issues

There are a number of theories in the literature to explain how firms choose their

financing. The very first theory suggested by economists is the rational theory. This

theory suggests that, with the assumption perfect market, in which the prices reflect

18 | P a g e

all information, behaviors are explained by the fact that goal of firms is to maximize

their shareholders’ value (Smith et al., 2011; Romano et al., 2001). Later on some

other theories were suggested to explain the more real behavior of firms in choosing

financing. Among them, agency theory (Romano et al., 2001; Chua et al., 2009; Wu et

al., 2007) is a popular one. According to this theory, level of debt is determined by

level of conflict of interests, or the agency cost, between creditors and shareholders.

Level of optimal debt is determined by optimization of benefits of debt and cost of

distress (Romano et al., 2001). A complementary concept to agency theory and

conflict of interests is asymmetric information (Romano et al., 2001; Chua et al.,

2009). Insiders know more about the situation of company than the investors do.

Pecking order hypothesis (Romano et al., 2001; Zhang et al., 2012; Tappeiner et al.,

2012) also form part of our knowledge about capital structure. It says firms prefer

internally generated funds. If they need more capital they go for debt. And only after

their debt capacity is fulfilled they use private equity. According to Tappeiner et al.

(2012) static trade-off model adjust pecking order in the way that it suggest that

firms may go for private equity even before their debt capacity is full.

In addition to these theories, the impact of several factors has been investigated by

scholars. For example, in Romano et al. (2001)’s model, size of firm, industry, age of

firm, age of CEO, and business planning are introduced as the factors which impact

firms’ capital structure. Dreux IV (1990) on the other hand, name the size, risk-

return profile of investments, nature of business, economic conditions, market

condition, and the purpose of fund raising as the influential factors on the firm’s

capital structure. Ownership structure is highlighted by some authors such as Croci

et al. (2011). Smith et al, (2011) emphasize the developing stage of the firm, and the

emergency and size of the financial need. Age of the firm, for example, has an

important role in how it finances its activity. As the firm gets older and next

generations control the firm, it becomes more professional(de Visscher et al., 2011).

Also due to the Family Business Triangle, which is about the conflicts related to external

financing and liquidity issues, family firms lose the intention to keep the control (de

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Visscher et al., 2011). So the family business becomes more similar to non-family

business in case of financing.

In this reasearchthe level of preference and importance of different sources of

financing in family and non-family firms is investigatedin order to compare them.

Each source of financing is categorized. The categories are internally generated

income, debt financing, or external financing. These three categories are the Pecking

Order Hypothesis’s elements. Figure 2.2 shows different common sources of

financing, their definitions, and their category within pecking order hypothesis’s

elements.

Figure 2.2. Different Sources of Financing

Financing Source Defenition Category

Friends and Family

Investments

Investments made by friends and family Internal

Bootstrapping Finding ways to avoid the need for external

financing through creativity, ingenuity,

thriftiness, cost-cutting, obtaining grants, or any

other means (Barringer & Ireland, 2008).

Internal

Current

Shareholders

Re-investments by current owners. This includes

unpaid dividends also.

Internal

Leasing To allow somebody to use a property for a

specific period of time in exchange for payments

(Barringer & Ireland, 2008).

Internal

Lendingfrom

commercial banks

Bank loans. Debt

Friend and Family

Loans

Loans from friends and family Debt

Other loans They might be government loans, asset based

lending, trade credit, publishing bonds, or any

Debt

20 | P a g e

other source, borrowing from which is important

to your company.

Angel investors Individuals who invest their personal capital

directly in start-ups (Barringer & Ireland, 2008). External

Venture Capital

firms

Venture Capital firms are limited partnership of

wealthy individuals, pension plans, university

endowments, foreign investors, and similar

sources which raise money to invest in growing

firms (Barringer & Ireland, 2008).

External

Strategic partners To receive financial, marketing, distribution, and

other kind of support from a partner company in

exchange for a specialized technical or creative

expertise (Barringer & Ireland, 2008).

External

Public Offerings Sale of stock to the public (Barringer & Ireland,

2008).

External

2.4. Research Hypotheses

Pecking order hypothesis suggests that firms are likely to finance their activities

firstly by internally generated funds(Romano et al., 2001; Zhang et al., 2012;

Tappeiner et al., 2012). They prefer debt after the internal financing and only then,

they go for private equity. Reviewing literature, this paper suggests that pecking

order hypothesis is more extreme in case of family firms. That means family firms’

intention for internal financing is higher than non-family firms and they use private

equity less frequently. The three elements of pecking order hypothesis are discussed

in the following paragraphs.

As discussed in the previous section, keeping influence and transgenerational

control within the family determine many of family businesses’ actions.Zhang et al.

(2012) claim that the main consequence of desire to keep control is conservative

financing strategies. By financing the firm internally, the chance of preserving the

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control over the firm and pass the firm to the next generation increases.

Furthermore, because of intention for succession and long term view of family

businesses, they prefer internal financing to have more long term return though

they might lose short term benefits of other financing ways (Sirmon & Hitt, 2003).

So it can be expected that family firms use more internal finances than non-family

firms. Unlike using internal sources of financing, private equities lead to

involvement of outsiders in the company. Family firms “avoid becoming dependent

on outside creditors or shareholders who might thereafter to remove ownership

and control” (Zhang et al., 2012, p. 98).Although private equity has some advantages

such as providing advice (Smith et al. 2011), managerial and support skills (Dreux

IV, 1990), smart money (Tappeiner et al., 2012), and lower cost for the family firms

(de Visscher et al, 2011), family firms prefer the internal financing and debt. Due to

families’ willingness to preserve control currently and for the next generation, they

are less likely to use external sources of financing (de Visscher et al., 2011; Romano

et al., 2001; Zhang et al., 2012; Wu et al., 2007; Croci et al., 2011). This fact is indeed

the cause of family business triangle (de Visscher et al., 2011). On one hand family

firms tend to preserve control over the firm, on the other hand they need capital to

grow and compete. That means they are concerned about the control issue when

they are in need of capital (de Visscher et al., 2011). So it can be assumed that family

firms intend to use less external sources of financing.

H1: Family firms useinternal finances more than non-family firms.

H2: Family businesses useexternal financing less than non-family firms.

Debt, comparing to private equity, does not lead to losing control by the family

(Croci et al., 2011). As a result, using debt as a source of financing, family firms are

not much concerned about involvement of outsiders in the business. Additionally,

since the level of conflict of interests between lenders and family owners are less

(Anderson et al., 2003; Chua et al., 2009), the cost of debt is less for family firms.As a

reminder, scholars suggest that the level of agency cost or conflict of interests is less

in family firms because of their social capital and also because of their attitude

22 | P a g e

toward keeping their identity and reputation (Anderson et al., 2003; Chua et al.,

2009). Preserving identity as a socioemotional wealth dimension impacts financing

in family firms. Family businessesintend to keep their reputation. Consequently they

avoid financially risky projects (Croci et al., 2011; Anderson, Mansi & Reeb, 2003;

Chua et al., 2009). Again there is a conflict between shareholders and bondholders.

Shareholders intend to invest in high risk high return project whilecreditors don’t

want to take the risk of paying for the failure. Creditors prefer low risk low return

projects (Anderson et al., 2003; Croci et al., 2011; Romano et al., 2001). In addition,

to preserve their image, family firms try to pay their duties in order to keep their

credibility. Knowing this, financiers provide them with lower cost debt. The role of

feelings in family firms also causes less expensive debt to be available to family

firms (Chua et al. 2009). Family members intend to support each other strongly

when each of them is in trouble. Lenders know this fact, in addition to family firms’

intention to preserve their image. Lenders therefore are more confident that they

will receive the money (Chua et al., 2009).Social capital of family firms is another

factor that leads to less expensive debt since it reduces agency cost of borrowing

(Chua et al., 2009). Since family firms have stronger relations, which is a dimension

of socioemotional wealth, more information is shared between them and lenders. In

summary since family firms usually avoid risky projects and they have stronger

social ties, the agency cost of borrowing decreases. Additionally lenders know that

family firms intend to preserve their image and have feelings among their members.

Due to these facts family firms have less expensive debt available.Since debt is less

control taking and less expensive for family firms, they use debt more than non-

family firms. So the third hypothesis of this research is stated as follows:

H3: Family firms usedebt more than non-family firms.

Figure 2.3 summarizes the hypotheses H1 to H3 about the different levels of

preference for different sources of financing in family and non-family businesses.

Although both follow pecking order hypothesis, family firms tend to prefer more

23 | P a g e

internal sources of financing, more debt, and less external sources of financing than

non-family businesses.

Figure 2.3 Hypotheses 1, 2, and 3

There are other factors which influence these relationships. Firm size is an

important factor which influences the choice of financing in firms (Romano et al.,

2001; Dreux IV, 1990). According to Romano et al. (2001) Pecking Order

Hypothesis applies specially for small businesses because the cost of external

financing is higher for small firms. “Small firms, compared to large, tended to be

more self-financing, had lower liquidity, rarely issued stock, had lower leverage,

relied more on bank financing and used more trade credit and directors' loans”

(Chittenden,Hall & Hutchinson, 1996, p. 60). To put another way, applying pecking

order hypothesis especially for small firms means that they use more internal

financing, more debt, and less external equities. Chittenden et al. (1996)explain why

firm size matters when firms decide on their source of financing: because of their

stage in firm life cycle, small firms have lack of access to capital market.In the first

stages of growth, in which firms are small, they use self-financing. Most of what they

have available is internal sources of financing (Chittenden et al., 1996). However this

24 | P a g e

source of financing is not enough especially when the company is experiencing rapid

growth (Chittenden et al., 1996). If they survived the dangers of under- capitalization

they can use other sources of financing such as short-term loans from banks

(Chittenden et al., 1996). “Not only is a stock market flotation expensive to

arrange but initial public offerings are subject to underpricing which seems to

be particularly severe for smaller firms.Having obtained a stock market flotation

small firms are likely to find themselves the victims of the small firm effect which

results in their having a higher cost of equity, for a given level of risk, than larger

firms” (Chittenden et al., 1996, p. 61). Chittenden et al. (1996) also discuss how

asymmetric information and agency cost are more in small firms. So the cost of

external equity for small firms increases further. “Monitoring could be more difficult

and expensive for small firms because they may not be required to disclose much, if

any, information and, therefore, will incur significant costs in providing such

information to outsiders for the first time. Moral hazard and adverse selection

problems may well be greater for small firms because of their closely held nature.”

(Chittenden et al., 1996, p.61)These agency problems add to the cost of external

equity available to small firms. The more expensive external financing available to

small firms the less external sources of financing they use. Internal sources of

financing, on the other hand, are the most of which is available to small firms

(Chittenden et al., 1996). Consequently when the firm is small, it uses more internal

sources of financing. Sometimes, however, internal sources are not sufficient to satisfy

the financial needs in the time of company growth (Chittenden et al., 1996). Growing

small companies, then, usually use other sources of financing such as short term bank

loans and trade credit and directors' loans (Chittenden et al., 1996; Romano et al.,

2001). Generally small firm have less access to external financing. If they want to

use external equity, it would be more expensive to them. As a result they intend to

use more internal financing, and when they are in need of more financing they have

to go for debt. Since firm size matters in financing choices of firms, it affects the

relationship between being a family firm and use of different sources of financing. If

the family firm is large, or firm size is high, then it uses more external sources of

financing. This happens because when the firm grows it has more access to capital

25 | P a g e

market and lower cost external equity (Chittenden et al., 1996). In other words, firm

size positively moderates the relationship between being a family firm and use of

external sources of financing. In comparison due to the fact that internal sources of

financing are the most available source to small firms (Chittenden et al., 1996), in

which firm size is low, and the next available source to them is debt (Romano et al.,

2001; Chittenden et al., 1996), firm size negatively moderates the relationship

between being a family firm and use of internal sources of financing and debt.

H4: Firm size negatively moderates the relationship between being a family firm and

use of internally generated financing and debt.

H5: Firm size positively moderates the relationship between being a family firm and

use of external financing.

Firm Age can also impact the relationship between being a family firm and the

preference for each source of financing. Business cycle discussions are not only

related to firm size, but also to firm age. At the first stages, when firm age is low,as

Chittenden et al. (1996) and Romano et al.(2001) have discussed,firms intend to use

self-financing. Since they need more financing sources to fund the growth they will

have to use bank loans (Chittenden et al., 1996; Romano et al., 2001). As discussed

before, at the beginning stages, when firm age is low, they do not have access to

external equity (Chittenden et al., 1996). “At inception businesses’ major sources of

finance are owner funds, with these being supplemented by relatives and friends. At

growth and maturity stages, bank funding, secured against personal assets, tends to

be employed, while equity is used for the expansion and growth of an enterprise.”

(Romano et al., 2001, p. 293) In addition there are some other issues related only to

family firms. For example according to de Visscher et al.(2011) family firms become

more professionally managed as they become older and next generations become in

charge of the business (de Visscher et al., 2011). In the first generation family firm

owners use all what they have to run and support the business without considering

the professional management tools and sources of financing. However, the next

generations think about professional management techniques and other sources of

26 | P a g e

financing (de Visscher et al., 2011). According to Romano et al.(2001) first-

generation owners are more likely to reject external sources of financing. This fact is

reflected into Family Business Triangle conflicts.The need for liquidity increases in

the next generations, and as a consequence the intention for keeping the control

within the family decreases as the firm gets older (de Visscher et al., 2011). To sum

up, firstly, with the same argument as firm size, firm age have the same influence on

the relationship between being a family firm and use of different sources of

financing as firm size. Also it can be argued that as firm age grows and next

generations become the owners of the company, they consider issues such as capital

and liquidity other than control, according to Family Business Triangle concept (de

Visscher et al., 2011). Additionally first generation uses more internal sources

(Romano et al., 2001) and next generation use more professional sources (de

Visscher et al., 2011). So they use more external equity and less internal sources of

financing and debt by which control of firm is kept within the family. So it can be

expected that as the family firm grows and firm age increases, the relationship

between being a family firm and use of external sources is positively affected. On the

other hand, the relationship between intention to keep control and use internal

sources and debt on one hand and being a family firm on the other hand is

negatively affected as firm age grows. These arguments are consistent with the ones

similar to firm size.

H6: Firm age negatively moderates the relationship between being a family firm and

use of internally generated financing and debt.

H7: Firm age positively moderates the relationship between being a family firm and

use of external financing.

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3. Methodology

3.1. Research Approach

Walliman (2006) classifies the objectives of a research as follows: to describe, to

explain, to compare, to correlate, and to act. Based on this classification, the

objectives of this research is to compare family and non-family firms in their choice

of financing, to correlate the level of preference of different sources of financing and

being a family firm, and to explain if there is a difference between family and non-

family firms in their choice of financing. Among these, according toWalliman (2006),

correlation objective can be in form of prediction or relation. Since this research

attempts to find the potential relationship between the level of preference of using

different sources of financing and being a family firm, this paper is a relational

research. Unlike other objectives, in correlational research, researchers often work

with numbers instead of words, artifacts, or observations (Walliman, 2006).

Using numbers, this paper attempts to deal with the research question through a

quantitative approach. To put another way, by analyzing the data gathered from a

survey, this research seeks to find out the answer to concerned issues. Walliman

(2006)’s explanation on quantitative techniques makes the approach of this

research more clear: “Quantitative techniques rely on collecting data that is

numerically basedand amenable to such analytical methods as statistical

correlations, often in relation tohypothesis testing” (Walliman, 2006, p.37).

Walliman (2006) mentions quantitativeresearch often uses deductive approach to

test theories. This fact applies to this paper as well.In a deductive argument a

general statement is discussed through a logical argument and based on it a

conclusion is derived. The conclusion can be stated as hypotheses which can be

tested in the research (Walliman, 2006).In this research the arguments build the

hypotheses of this research.The arguments in this work begin with the general

theories on family businesses. Then through exploring the literature specific issues

such as transgenerational control (Zellweger et al., 2011b), organizational identity

(Gómez-Mejía et al., 2007), and pecking order hypothesis (Romano et al., 2001) are

28 | P a g e

discussed in detail. Lastly through logical arguments some hypotheses are derived

which will be tested in next chapters of the paper.

The testing of the hypotheses, as it is stated earlier, is through quantitative

techniques and by statistical tools. Using statistical tools, the research can be

designed in different ways. This research has a cross-sectional design. Cross-

sectional methods are often in company with surveys (Walliman, 2006). This

research is not an exception and uses surveys to collect cross-sectional data. To put

another way, the data are gathered from a sample of many (171) observations and

from a single point of time (August 2012).

3.2. Data Collection

The data used in this research is collected through a survey which means the data is

from a primary source. A questionnaire is designed to be sent to family and non-

family firms in Sweden to ask them about their preferences for different sources of

financing.

The process of sampling started with finding the list of all registered companies

with an active website in Sweden from database of AMADEUS. Then by assigning a

random number to each entry using Microsoft Excel and sorting according to the

random number, the first 2600 companies were selected as the sample. This kind of

sampling is called simple random sampling which is a kind of probability sampling

(Walliman, 2006).Using their websites, all the email addresses of the sample

companies were looked up. By the software ‘Smart Serial Mails’ a link of the

questionnaire and a request for participating in the survey were sent to each email

address. Also two reminders, each after one week, were sent to the companies

asking them to participate in the survey if they have not already done that.

Out of 2600, 171 companies responded to the questionnaire in a way that it can be

used. The response rate is, so, 6.58%. 73 of the responses are from family firms and

the rest (98) are related to non-family firms.

29 | P a g e

3.3. The Questionnaire

Internet or online surveys have increasingly been used by the researchers in the

recent years (May, 2011). The recent developments in technology and the use of

internet made the process of online surveys much easier. Online surveys also save

considerable resource for the researcher (May, 2011). The response rate to the

online surveys has declined during last several years due to the increasing number

of such surveys (May, 2011). However since online surveys give the respondents

freedom of time and place (May, 2011), online surveys are still a proper way of

conducting research.

Online survey is what is used in this research. In fact an online questionnaire is

designed using Google Doc or Google Drive online service which has a free

questionnaire designing tool. The link to the questionnaire can be found in

Appendix 1. In designing the questionnaire, different electronic form elements are

used. For example textboxes are used for the questions which ask respondents to

enter other information. For instance they are asked to enter other sources of

financing which they think was important to them. Radio buttons and check boxes

are, on the other hand, used for the multiple questions such as their industry or

their attitude toward a source of financing.

The questionnaire is attempted to be well structured and clear. It consists of three

sections. The first section is classification sector which is also called face sheet

information (May, 2011). In this section the companies are asked to answer

questions which are related to general information of the company such as the

number of employees (as a representative of the firm’s size), industry, firm age, and

being public. These questions are used in the analysis as control variables or

moderators. The second section is related to being a family firm which is the

independent variable in this research. Some factual questions (May, 2011) about

being a family firm are asked in this section. The first question asks them if they are

a family firm. If yes some other questions regarding the extent of being a family firm,

such as generation in control or percentage of family ownership are stated. If not,

30 | P a g e

they are asked to go directly to the last section. The last section is designed to

measure the firms’ attitude toward different sources of financing. In order to do that,

Likert scale is used. Based on what Siegle (2010) presented, the respondents could

choose between: ‘Very Important, ‘Important’, ‘Moderately Important’, ‘of little

importance, and ‘Unimportant’. The sections and the instructions are mentioned in

the beginning of the questionnaire in order to make the questionnaire clear.

Other than a good structure, choosing the correct wording helps to remove

ambiguity and make the research more reliable (May, 2011).There is an analogy in

May(2011)’s book which compare questioning people to fishing. Sometimes a

particular fish is targeted but without knowing what is happening under the surface,

different kinds of creatures are catch. The questions should be clear and free of

ambiguity (May, 2011). This is what is tried in this research as well.

Other than to state the questions clearly, it is vital to know what the questions are

for. May(2011) has stated the concept of operationalization of the hypotheses as

defining “a concept or variable so that it can be identified or measured” (May, 2011,

p. 106). So since the purpose of this research is to know the relationship between

being a family firm and the attitude toward different sources of financing, the

definition of being a family firm and each sources of financing is clearly known and

stated in the questionnaire. The questionnaire and a link to itarestated in Appendix

1.

3.4. Data Analysis

The data collected by the mean of Google Drive form, is downloaded as an Excel file.

Then they are arranged in a proper way and unusable entries are deleted. Finally

the data is imported into SPSS software for further analysis.

The analysis should be in a way that can deal with the research purpose and

question. The main purpose of this research is to find a relationship between the

level of preference for different sources of financing and being a family firm. Also

31 | P a g e

the impact of other factors can be investigated to know more about the issue. In

order to do that, 4 regression models are designed as follows:

Model 1: Source of Financing = α + β1 (Control Variables) + ε

Model 2: Source of Financing = α + β1 (Control Variables) + β2 (Family Firm) + ε

Model 3:Source of Financing = α + β1 (Control Variables) + β2 (Family Firm) + β3

(Moderators) + ε

Model 4: Source of Financing = α + β1 (Control Variables) + β2 (Family Firm) +

β3(Moderators) + β4 (Moderators× Family Firm) + ε

By using these 4 models the relationship between being a family firm, which is the

independent variable, and the preference for each source of financing, as the

dependent variable, can be examined. This deals with the first three hypotheses of

the research. Also the effect of other factors such as industry or being a public

company as the control variables can be known. It can also be investigated if there is

a moderating effect by including the moderators and their interaction with the

independent variable (Kenny, 2011). The moderators are firm size and firm age

according the last four hypotheses.

The dependent variable, Source of financing, refers to each of the sources of

financing presented in Figure 3. As a result there are 11 regressions each of which is

specified to one of the sources of financing as its dependent variable. To measure

Source of Financing, Likert scale is used. In a specific manner, firms are asked how

important were each source of financing to them in the past 5 years. To answer the

questions, based on what Siegle (2010) presented, they could choose between: ‘Very

Important, ‘Important’, ‘Moderately Important’, ‘of little importance, and

‘Unimportant’. This means the variable which represents the importance of use of

each source of financing is an ordinal categorical variable (Lavrakas, 2008).

Wooldridge (2005) motioned that in dealing with ordinal variables there are two

approaches in the model. First, treat them just like numerical variables. This is only

32 | P a g e

possible if going from one category to the next one is fairly comparable to going

from another category to its next one; i.e. the difference between ‘Unimportant’ and

‘Of little importance’ is approximately equal to the difference between ‘Important’

and ‘Very Important’. A better approach according to Wooldridge (2005) is to

introduce a dummy variable for each of the categories. Due to comparability of the

choices; the relatively large number of choices in different variables; and

simplification of the interpretation; the first approach is used in this research.

The independent variable, which is a dummy variable, is Family Firm. Family Firm is

1 if the company is a family firm; otherwise it is 0. The companies are asked to

choose if they are a family firm. It is explained to them that they can choose family

firm if two or more founding family members or descendants are involved in the

business. This definition of family firms is consistent with one of the definitions

mentioned by Chua et al. (1999, p. 21): Family business is a business “in which two

or more extended family members influence the direction of the business through

the exercise of kinship ties, management roles, or ownership rights”.

Some control variables and moderators are also included into the models. Firm size

and firm age, which are the moderators, are interval or scale (May, 2011) variables.

In order to get firm size, the respondents are asked to write the number of

employees working in the company. Number of employees is what is used as a proxy

of firm size by scholars (Cabral & Mata, 2003). To get the firm age, the questionnaire

has a question that asks about the number of years since the firm is established. The

industry and being public are the control variables in the models. The industry in

which the company is operating is a nominal variable. Respondents can choose their

industry in the questionnaire or write an industry if it is not listed. Finally, being

public is a dummy variable which is 1 if the company is public and is 0 if the

company is private.

Figure 3.1 summarizes the variables in the models.

Figure 3.1. Variables

33 | P a g e

Variables Explanation Type Category

Source of Financing

The level of preference for each of the

sources of financing in Figure 2.2.

Ordinal Dependent

Industry The industry in which the firm

operates

Nominal Control

Being Public If the company is public Dummy Control

Family Firm If the firm is a family business Dummy Independent

Firm Age The number of years since the firm is

established

Scale Moderator

Firm Size The number of employees working in

the company

Scale Moderator

3.5. Validity and Reliability

In order to have a good research, it should be replicable, which means other

researchers can go through the same research procedure and get the same result

(May, 2011), Walliman, 2006). Replicabilityof a research is in a close relationship

with validity and reliability (May, 2011).

Validity refers to a situation when a research measures what it is intended to

measure (May, 2011). This research is designed in a way to fulfill validity. The

variables are chosen based on the definitions from previous scholars. For example

the definition of family firms is derived from Chua et al. (1999)’s paper. The

questionnaire design is also designed in order to measure the variables in a proper

way. The measurement of level of preference for different sources of financing, for

instance, is done by the mean of Likert scale which is one of the most common used

tools to measure ordinal attitude (May, 2011).

34 | P a g e

“Reliability is about the degree to which the results of the research are

repeatable.”(Walliman, 2006, p. 34)By explaining the meaning of each statement

and concept in the questionnaire, it is attempted to have a reliable research. When

the concepts are clearly defined in the questionnaire, the respondents are more

likely to understand them in the same correct way (May, 2011). As a result, their

answers in different occasions would be the same. So if the research is repeated, it

can be expected to get the same response. This work has tried to minimize the

biases and be a reliable and valid research.

35 | P a g e

4. Result

4.1. Descriptive Analysis and Correlations

Figure 4.1 shows observed numbers, mean, standard deviation of each variable, and

correlations among them. Observed numbers show that almost all data are available

for most of the variables. Industry and Private/Public are the exceptions. Number of

entered industries is 90 which means 83 of companies has not entered their

industry. As industry is not an important variable in the models, its lack would not

make a problem in interpreting the result.

Most variables are the sources of financing which are ordinal variables based on

Likert scale. As it can be found in Figure 4.1 their means are between 1.5 and 3.

Private/Public and Family Firm are dummy variables. So their means lie between 0

and 1. Since the Family Firm’s mean is less than 0.5, most companies are non-family

firms. Also due to the fact that Private/Public’s mean is less than 0.5, most entries

are private companies.

The standard deviations related to ordinal, categorical and dummy variables were

predictable as what is shown in Figure 4.1. Standard deviation of firm size, which is

equal to 1989, shows that different companies from very small ones to very large

ones have participated in the survey.

Figure 4.1 also shows correlations between different variables in the models. It also

shows whether they are significant. The sign ‘**’ means p-value of 0.01 or lower

which means the correlation is significant at the level of 1%. Sign ‘*’ stands for p-

value between 0.01 and 0.05 meaning that the correlation is significant at the level

of 5%. Additionally sign ‘Ɨ’ represents p-value between 0.05 and 0.1 and correlation

is significant at the level of 10% (Wooldridge, 2005). The important issue here is to

see the correlations between Family Firm and different sources of financing to get a

glimpse of the relationships between being a family firm and use of different sources

of financing. Correlations between Family Firm and Bootstrapping, Friends and

Family Investment, Public Offering, Borrowing from Friends and Family,and Other

36 | P a g e

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37 | P a g e

Kinds of Loan are significant as Figure 4.1 shows. All are in line with the hypotheses

H1 to H3. In other words, the correlation between being a family firm and

bootstrapping and friends and family investments are positive. It is also shown that

correlation between public offering, which is an external source of finance, and

being a family firm is negative. Just as H3 predicted, correlation between being a

family firm and use of borrowing from friends and family and other kinds of loan is

positive.

4.2. Internal Sources of Financing

Although the correlations can give a glimpse of the relationship between different

variables, four regression models are also used to have a more precise analysis. For

each source of financing as the dependent variables, four models are applied. Four

sources of financing, as Figure 2.2 presents, are internal sources. They are

Bootstrapping, Investments by Friends and Family, Current Shareholders, and

Leasing.

Starting from Bootstrapping as the dependent variable, all the four models have a

significant F value. Especially in the last three models, the variables can explain

more than 60% of the level of preference for Bootstrapping as R square show. In the

last three models in which Family Firm, as the independent variable, is included,

there is a significant positive relationship between being a family firm and

preference over bootstrapping as a source of financing. This supports H1. Model 4

shows none of the interaction effects are significant, however it shows a negative

relation between interaction of firm age-family firm which is in favor of H4.

Just like Bootstrapping, Friends and Family Investments is an internal source of

financing according to definitions (Barringer & Ireland, 2008). In this case also the

models are significant as their F tests show. The impact of being a family firm on the

preference over Friends and Family Investments is significantly positive. As a result,

H1 is supported in this case as well. H4 is not supported since the standardized beta

for interaction of firm size-family firm is positive. In contrast, the impact of

38 | P a g e

interaction of firm age-family firm on use of friends and family investments is

negative and moderately significant. So H6 is supported in this case.

Current Shareholders is another internal source of financing. The models which

analyze them show significant F values. The last three models show a significant

positive relation between being a family firm and depending on current

shareholders as source of financing. This is a further support for H1. The interaction

effects are not significant. However the beta for impact of interaction of firm age-

family firm on depending on current shareholders as source of financing is negative,

which is in favor of H6. The last internal source of financing is leasing. The models

are significant. H1 is supported once more. With this, H1 is supported for all the

internal sources of financing. The moderating effect of firm size is positive which

means H4 is not supported. Although H6 is not significant as well, the result shows a

non-significant negative moderating effect of firm age.

Figure 4.2. Regression Models, Dependent Variable: Bootstrapping

Model 1 Model 2 Model 3 Model 4

Industry -0.112 -0.002 0.048 0.045

Type (Private/Public) -0.376 ** 0.215 * 0.143 0.144

Family Firm (FF) 0.889 ** 0.900 ** 0.876 **

Number of Employees (NoEm) 0.129 Ɨ 0.134 Ɨ

Firm Age (Age) 0.196 ** 0.193 *

FF * NoEm -0.126

FF * Age 0.124

R Square 0.167 0.576 0.631 0.635

Adjusted R Square 0.147 0.560 0.607 0.602

F 8.313 ** 37.061 ** 27.306 ** 19.384 **

39 | P a g e

Figure 4.3. Regression Models, Dependent Variable: Friends and Family Investments

Figure 4.4. Regression Models, Dependent Variable:Current Shareholders

Figure 4.5. Regression Models, Dependent Variable:Leasing


Industry -0.151 -0.092 -0.091 -0.079

Type (Private/Public) -0.374 ** -0.066 -0.069 -0.066

Family Firm (FF) 0.469 ** 0.470 ** 0.519 **

Number of Employees (NoEm) 0.011 -0.006

Firm Age (Age) 0.003 -0.004

FF * NoEm 0.414 *

FF * Age -0.354 Ɨ

R Square 0.182 0.297 0.297 0.346


F 9.109 ** 11.409 ** 6.681 ** 5.821 **


Industry -0.423 ** -0.386 ** -0.363 ** -0.366 **

Type (Private/Public) -0.120 0.077 0.038 0.029

Family Firm (FF) 0.297 * 0.303 * 0.350 *

Number of Employees (NoEm) 0.081 0.085

Firm Age (Age) 0.093 0.108

FF * NoEm 0.017

FF * Age -0.091

R Square 0.209 0.255 0.270 0.273


F 10.975 ** 9.346 ** 5.923 ** 4.189 **


Industry -0.169 -0.118 -0.141 -0.126

Type (Private/Public) -0.214 * 0.061 0.086 0.098

Family Firm (FF) 0.413 ** 0.409 ** 0.411 *

Number of Employees (NoEm) -0.024 -0.046

Firm Age (Age) -0.091 -0.110

FF * NoEm 0.391 *

FF * Age -0.259

R Square 0.085 0.173 0.182 0.231


F 3.876 * 5.737 ** 3.559 ** 3.354 **

40 | P a g e

4.3. Debt

There are three debt sources of financing including Bank Loans, Borrowing from

Friends and Family, and Other Kinds of Loan. Bank loans are the first debt source of

financing. The models which have bank loans as dependent variable show

significant F. However the R squares are low. In models 2 to 4, a positive significant

relation between being a family firm and use of bank loans is shown. So H3 is

supported in case of bank loans. None of the interaction effects supports H4 or H6

however.

The models for Borrowing from Friends and Family are also significant as F values

show. R squares are low for the models. Again all the models support H3. In other

words the relationship between being a family firm and use of Borrowing From

Friends and Family is significantly positive.

Other kind of debt is the only debt source of financing which does not support H3.

Still the positive sign of its beta in the models are in accordance with H3. F for Other

Kinds of Loan is significant at the level of 5%.

Figure 4.6. Regression Models, Dependent Variable: Bank Loans


Industry -0.203 Ɨ -0.143 -0.112 -0.106

Type (Private/Public) 0.233 * 0.530 ** 0.534 ** 0.556 **

Family Firm (FF) 0.450 ** 0.452 ** 0.336 *


Firm Age (Age) 0.117 0.082

FF * NoEm -0.093

FF * Age 0.259

R Square 0.080 0.185 0.210 0.228


F 3.551 * 6.116 ** 4.202 ** 3.251 **

41 | P a g e

Figure 4.7. Regression Models, Dependent Variable: Borrowing from Friends and Family

Figure 4.8. Regression Models, Dependent Variable: Other Kinds of Debt

4.4. External Sources of Financing

Angel Investors, Venture Capitalists, Public Offerings, and Strategic Partners are

categorized as external sources of financing in Figure 2.2. Most of the models in this

category do not have significant F and acceptable R Square. In the models where

Public Offerings is the dependent variable and Model 4 of Strategic Partners F is

significant. Only Model 3 and 4 of Public Offerings and Model 4 of Strategic Partners

moderately (0.05 < p-value < 0.1) support H2. In other words Family Firm’s

coefficients in those models are negative, meaning that there is a negative


Industry 0.104 0.156 0.146 0.130

Type (Private/Public) -0.375 ** -0.099 -0.082 -0.119

Family Firm (FF) 0.414 ** 0.412 ** 0.574 **


Firm Age (Age) -0.038 0.024

FF * NoEm -0.122

FF * Age -0.195

R Square 0.139 0.228 0.231 0.287


F 6.718 ** 8.075 ** 4.809 ** 4.481 **


Industry 0.176 0.195 Ɨ 0.141 0.148

Type (Private/Public) 0.201 Ɨ 0.302 * 0.372 * 0.376 *

Family Firm (FF) 0.151 0.140 0.150


Firm Age (Age) -0.214 Ɨ -0.220 Ɨ

FF * NoEm 0.200

FF * Age -0.149

R Square 0.082 0.094 0.150 0.162


F 3.727 * 2.840 * 2.818 * 2.150 *

42 | P a g e

relationship between being a family firm and use of external sources of financing.

Figure 4.9. Regression Models, Dependent Variable:Angel Investors

Figure 4.10. Regression Models, Dependent Variable: Venture Capitalists

Figure 4.11. Regression Models, Dependent Variable: Public Offering


Industry -0.155 -0.179 -0.195 Ɨ -0.187

Type (Private/Public) -0.135 -0.261 Ɨ -0.234 -0.235

Family Firm (FF) -0.190 -0.194 -0.144


Firm Age (Age) -0.064 -0.062

FF * NoEm 0.301

FF * Age -0.281

R Square 0.049 0.067 0.075 0.100


F 2.121 1.971 1.290 1.237


Industry 0.021 0.042 0.044 0.057

Type (Private/Public) -0.020 0.093 0.104 0.126

Family Firm (FF) 0.169 0.167 0.085


Firm Age (Age) 0.010 -0.028

FF * NoEm 0.179

FF * Age 0.024

R Square 0.001 0.015 0.018 0.047

Adjusted R Square -0.023 -0.021 -0.043 -0.038

F 0.029 0.427 0.300 0.551


Industry -0.161 Ɨ -0.184 * -0.268 ** -0.267 **

Type (Private/Public) 0.632 ** 0.505 ** 0.612 ** 0.615 **

Family Firm (FF) -0.190 -0.206 Ɨ -0.220 Ɨ

Number of Employees (NoEm) -0.150 Ɨ -0.152 Ɨ

Firm Age (Age) -0.332 ** -0.337 **

FF * NoEm -0.001

FF * Age 0.024

R Square 0.394 0.412 0.542 0.543


F 26.951 ** 19.179 ** 18.955 ** 13.215 **

43 | P a g e

Figure 4.12. Regression Models, Dependent Variable: Strategic Partners

4.5. Moderating Effect of Firm Size

To examine H4, H5, H6, and H7 the interactions in the models, which are ‘FF * NoEm’

and ‘FF * Age’ should be considered. H4 and H5 are related to moderating effect of

Firm Size or Number of Employees. The interactions are just shown in Model 4 of

each source of financing. About the moderating effect of Firm Size the interaction

coefficients in models related to Friends and Family Investments, Leasing, and

Strategic Partners are significant (Figure 4.3, Figure 4.5, Figure 4.12). The

coefficients in Friends and Family Investments and Leasing are positive which

refute H4. The signs do not support H4 in fact. In case of Strategic Partners which is

an external source of financing sign of interaction coefficient is negative which is not

in favor of H5. As a result H5 is not supported by the result.

To show the moderating effects visually, their plots are presented. The vertical axis

shows the level of preference for the source of financing. While the horizontal axis

stands for Level of firm size. The solid line represents non-family firms and the

dotted line represents family firms. Figure 4.13 shows a higher slope for family

firms. In other words if firm size increases it has more positive impact on family

firm in using Investments by Friends and Family. This is against H4 indeed. Figure

4.14 shows the same thing for Leasing. Again the slope for family firm is higher so as


Industry 0.013 0.025 0.033 0.033

Type (Private/Public) -0.159 -0.105 -0.096 -0.033

Family Firm (FF) 0.083 0.082 -0.286 Ɨ


Firm Age (Age) 0.034 -0.071

FF * NoEm -0.427 *

FF * Age 0.896 **

R Square 0.025 0.028 0.034 0.211

Adjusted R Square 0.001 -0.008 -0.028 0.140

F 1.043 0.787 0.549 2.950 **

44 | P a g e

firm size grows family firms use more leasing than what non-family firms do. H4 is

weakened further.

Since Strategic Partners is an external source of financing, Figure 4.15 show

whether H5 is supported. This in fact is not the case. In other words H5 is not

supported. As figure 4.15 shows as firm size increases, using Strategic Partners as

the source of financing decreases more in case of family firms than what it does for

non-family firms. H5 suggests that firm size has a positive moderating effect on the

relationship between being a family firm and use of Strategic Partners as an external

source of financing. However, as Figure 4.15 shows, the result suggests a negative

moderating effect.

Figure 4.13. Moderating effect of Number of Employees (Firm Size), Dependent Variable: Friends and Family Investments

45 | P a g e

Figure 4.14. Moderating effect of Number of Employees (Firm Size), Dependent Variable: Leasing

Figure 4.15. Moderating effect of Number of Employees (Firm Size), Dependent Variable: Strategic Partners

4.6. Moderating Effect of Firm Age

To examine H6 and H7 first the significant interaction coefficients of ‘FF * Age’

should be distinguished. Figure 4.3 and Figure 4.12 show that interaction coefficient

is significant in case of Friends and Family Investments and Strategic Partners. Since

Friends and Family Investments is an internal source of financing its interaction

coefficient tests H6. While Strategic Partners are external sources of financing, the

coefficient of ‘FF * Age’ shows whether H7 is supported. In fact both show support

for the hypotheses. That means the coefficient related to Friends and Family

Investments is negative and significant. Also the coefficient related to Strategic

46 | P a g e

Partners is significantly positive which is in line with H7.

Figure 4.16 and Figure 4.17 show what is discussed above. Figure 4.16 show a lower

slope for family firms. That means as firm age increases family firms decrease their

level of Family and Friends Investments more than what non-family firms do. That

is a negative moderating effect of Firm Age on the relationship between being a

family firm and using Friends and Family Investments as an internal source of

financing. InFigure 4.17, in contrast, the slope related to family firms is higher. That

means Firm Age has more positive impact on preference over Strategic Partners by

family firms than by non-family firms. This shows an evidence for H7.

Figure 4.16. Moderating effect of Firm Age, Dependent Variable: Friends and Family Investments

Figure 4.17. Moderating effect of Firm Age, Dependent Variable: Strategic Partners

47 | P a g e

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48 | P a g e

` 5. Discussion

5.1. Conclusion

Family businesses make a large proportion of all businesses. Studying and

conducting research on family firms, therefore, is essential in understanding all

businesses (Miner, 2010). So far what is known about family firms is that non-

financial goals play an important role in their decision making procedure (Chrisman

et al., 2012). To develop the idea,Gómez-Mejía et al.(2007) introduce the term of

socioemotional wealth. They state that the main goal of family firms is to preserve

their socioemotional wealth rather than maximizing their financial profit.

Socioemotional wealth is “non-financial aspect of the firm that meets the family’s

affected needs such as identity, the ability to exercise family influence, and the

perpetuation of the family dynasty” (Gómez-Mejía et al., 2007, p.

106).Socioemotional wealth can be in forms of control, identity, social relations,

emotions, or dynasty succession (Berrone et al., 2012). Due to this difference in

their main goal, family firms behave differently than non-family firms in their

activities. One of the activities is the financing decisions. According to previous

research (Romano et al., 2001) family firms are different in their financing activities.

The difference in financing activities could be explained by the role of

socioemotional wealth in family firms. Preserving control and dynasty succession

causes family firms to avoid financing sources which leads to involvement of

outsiders (Zhang et al., 2012). They instead rely more on internally generated

income which does not cause loss of control over the company (Zhang et al., 2012).

Due to preservation of social relations, identity, and emotions, which are different

dimensions of socioemotional wealth in family firms, they have less expensive debt

available (Chua et al., 2009). As a result it can be expected that they use debt more

than non-family firms as a source of financing.

There are some other factors such as firm size and firm age which can impact the

relationship between being a family firm and preference for different sources of

49 | P a g e

financing (Romano et al., 2001). Regarding firm size, due to the fact that small

businesses have less access to capital market, it can be assumed that they use less

external financing (Chittenden et al., 1996). They instead rely more on internal

sources and debt. Large family firms, in comparison, are more similar to non-family

firms; they use less internal sources of financing, less debt, and more external

sources of financing (Chittenden et al., 1996). As firm age, which is another

moderating factor, increases and business goes under the next generations’ control,

it becomes more professionally managed (de Visscher et al., 2011). Consequently

family firms become more similar to non-family firms. That, again, means they use

less internal sources, less debt, and more external sources of financing.

In this research these arguments are tested empirically. The result shows that

family firms use internal sources more than non-family firms. All the models for any

of the internal sources of financing support this hypothesis. They also use more debt.

In case of two out of three debts the hypothesis about more preference of family

firm over debt is shown. Even in the models of Other Kinds of debt in which

coefficient of being a family firm is not significant, the sign, which is a plus, is

consistent with the hypothesis.However, the result have a little support for the

hypothesis which assumes family firms use less external sources of financing. The

models are weak in this case. R square in most models related to external sources of

financing is less than 0.1 which is very low. There are only few models such as those

related to Public Offering and one model of Strategic Partners in which R square is

higher and models are significant as F tests show. Althoughthe result related to

those significant models support H2, it cannot be generalized. To put it other way,

based on the result it can be claimed that family firms use less public offering and

strategic partners than non-family firms. However, the result cannot be generalized

for all external sources of financing. There is also no support for the hypotheses

about the firm size. That means there is no evidence that firm size negatively

moderates the relationship between being family firm and the use of internally

generated financing and debt. In fact, the significant results show the opposite. The

results related to moderating effect of firm age are in a same situation as external

50 | P a g e

sources of financing. In other words, most results have same sign as hypothesis.

However, only two of them are significant. So it can be claimed that firm age has a

negative moderating effect on the relationship between being a family firm and use

of family and friends investments as an internal source of financing, and has a

positive impact on the relationship between being a family firm and use of strategic

partners as an externalsource of financing. However, the moderating effects cannot

be claimed in general for all internal, debt, and external sources of financing.

5.2. Discussions

As result shows there is more preference for internal sources of financing in family

firms compared to non-family firms. This is in line with the argument that the main

goal of family firms is to preserve their socioemotional wealth (Gómez-Mejía et al.,

2007). Therefore they are eager to keep the control of firm within family, both at the

current time and for next generations. Note that control and dynasty succession are

dimensions of socioemotional wealth (Berrone et al., 2012). Use of internal sources

of financing does not lead to loss of control of the firm (Smith et al., 2011). Since use

of internal sources of financing is not against family firms’ goal to preserve their

control and dynasty succession, they are more intended to use internal sources than

non-family firms.

Bank loans and borrowing from friends and family are two debt sources of financing.

Result shows that family firms use more of these two sources than non-family firms.

In developing the hypotheses it is discussed that due to three reasons family firms

have access to less expensive debt; consequently they use more debt compared to

non-family firms. The first reason is that financiers know the importance of

preserving emotions, which is a dimension of socioemotional wealth (Berrone et al.,

2012); and therefore they know that family members do not let each other alone in

bad financial and non-financial situations. To put another way family firms have

altruism among their members and financiers know that (Chua et al., 2009).

Another thing that financiers know is that it is important to family firms to preserve

their image and credibility. Identity according to Berrone et al. (2012) is a

51 | P a g e

dimension of socioemotional wealth. Family firms intend to be on time and accurate

in their duties. Knowing these facts, financiers are ready to provide family firms

with less expensive debt. Additionally family firms’ intention to preserve their social

relations is another dimension of socioemotional wealth. Due to the stronger social

relations, more information is shared between family firms and lenders. So agency

cost of borrowing decreasefor family firms (Chua et al., 2009). This adds to other

reasons why family firms have access to debt at a lower cost. Lower cost debt

available to family firms makes them to use more debt than non-family firms. This

argument is consistent with the results about bank loans and borrowing from

friends and family. Other kinds of debts however did not show a strong support for

the hypothesis. Although sign of the coefficient of being a family firm in the models

of which other kinds of debts is the dependent variable is in line with the hypothesis,

it is not significant. One reason that can explain this is that the term other kinds of

debt is too general. Despite the fact that it is explained what other debts could be in

the questionnaire, respondents might be ignorant about it. They might be confused

about the term or they may not be able to recall what other debts can be. If some

other debts were separately stated in the questionnaire, perhaps the result would

be different.

Results about external sources of financing are challenging. Most models are not

meaningful, and in those which are meaningful the arguments of the hypothesis are

supported. In case of public offerings and strategic partners, models are significant

and coefficients significantly show that family firms use less public offerings and

strategic partners than non-family firms. In these cases, it can be argued that family

firms have more intention to preserve current and transgenerational control as

dimensions of socioemotional wealth (Berrone et al., 2012). This argument is the

mirror of arguments about internal sources which is discussed above. External

sources, such as public offerings and strategic partners, take the current and

transgenerational control of the firm from family members. Consequently they use

less of them than non-family businesses. Although in two external sources of

financing this argument is supported, in two other sources it is not. The importance

52 | P a g e

of some theories, so, is underestimated for external sources of financing. For

example de Visscher (2011)’s explanation of family firm patient capital is one of

those theories that need to be considered further. According to de Visscher

(2011)family firms have access to low cost capital.In de Visscher et al. (2011)’s

model cost of capital is a function of family effect. Family effect is the non-financial

features such as relationships, emotions, etc. in family firms. As family effect

increases, the cost of capital to the family firm decreases (de Visscher, 2011). This

argument is to some extent similar to that of more use of debt by family firms. Since

family firms have access to less expensive capital, they might use more or at least

equal external sources of financing. Another explanation for the unexpected result is

related to the value of advice. According to Smith et al. (2011) involvement of

outside investors can be passive or active. Active involvement may be limited to

monitoring or may involve the presence of investor in the top management team or

as the CEO. Active involvement of investors, as Smith et al. (2011) mention, adds

value at least in two ways. “First, the entrepreneur’s willingness to accept

monitoring can help overcome investor concern that the entrepreneur will try to

take advantage of the financing relationship for personal gain. Second, a monitoring

relationship can enhance the flexibility and adaptability of the venture.” (Smith et al.,

2011, p. 582) Due to the fact that family firms know the value of advice, they have

intentions to use external sources.

Chittenden et al. (1996) and Romano et al. (2001) argued that the most available

financial sources to small firms are internal sources. The next available source is

debt and firms have access to external sources of financing only when they are large

(Chittenden et al., 1996; Romano et al., 2001). These are the bases for arguments

that firm size positively moderates the relationship between being a family firm and

use of external sources of financing andnegatively moderates the relationship

between being a family firm and internal sources and debt. However, result shows

that this is not the case. The result do not support this view since the interaction

coefficient is not significant in most cases and in those cases that they are significant,

hypotheses are not confirmed (H4 and H5 in Figure 4.18). This may occurs because

53 | P a g e

more availability does not necessarily mean more use. Other factors may have more

important role in family firms that firm size cannot impact their decisions on

financing.Although external sources are more available to family firms, for instance,

succession of company to the next generation is so important to family firms that

they avoid using them. Firm size also cannot negatively moderate relationship

between being a family firm and use of internal sources and debt. Preserving

socioemotional wealth, including current and transgenerational control, is so

important to family firms that they use internal sources and debt despite their size.

The arguments about moderating effect of firm age have two parts. First it has same

argumentation as firm size. When firm is at its beginning stages of growth, it has no

access to external sources of financing and its only available source of financing are

internal sources and debt (Chittenden et al., 1996). This argument as it is discussed

above is not applicable for family firms. This fact is reflected on result about

moderating effect of firm age as its moderating coefficients in most cases are not

significant.However for two sources of financing, one related to H6 and one to H7, in

which the coefficients are significant, hypotheses are supported. This can be related

to the other part of argumentation about moderating effects of firm age: Family

firms use more professional managerial tools and financial sources as firm’s control

goes to the next generations’ control (de Visscher et al., 2011). Additionallyin next

generation due to concept of Family Business Triangle, there will be a conflict

among family members whether to keep control, capitalize their company, or take

out their ownership income. As a result intention for keeping control weakens (de

Visscher et al., 2011). In line with these arguments, result shows that in some cases

firm age has a negative moderating effect on the relationship between being a family

firm and use of internal sources of financing and debt, and has a positive moderating

effect on relationship between being a family firm and use of external sources of

financing.

54 | P a g e

5.3. Contributions

The main theory used in this paper to explain the financing activities of family firm

is socioemotional wealth theory of Gómez-Mejía et al.(2007). Previous works show

that preserving socioemotional wealth is a key factor in explaining different

decisions by family firms (Berrone et al., 2012). Gómez-Mejía et al.(2007) for

example explain how intention to preserve socioemotional wealth causes family

firms not to cooperate even though cooperation has many financial benefits. Instead,

they prefer to preserve control which is a dimension of socioemotional wealth. As

another exampleBerrone, Cruz,Gomez-Mejia, andLarraza-Kintana (2010)report how

preserving family image and identity, which is another dimension of socioemotional

wealth, in family firms leads to less polluting activities by them.In a same direction,

this paper has developed the idea of socioemotional wealth to predict the financing

behavior of family firms and their difference to non-family firms. It shows that

socioemotional wealth theory has the potential to explain different decisions such as

financing choices of family businesses. By investigating the impact of preserving

different dimensions of socioemotional wealth introduced by Berrone et al. (2012)

in family firms, this work predicts the financing preferences of family firms. All three

hypotheses based on this theory are almost supported by the result. As the theory of

preserving control and transgenerational control dimensions of socioemotional

wealth in family firms predicted, family firms have more preference for internal

sources of financing. In addition, in line with the theory of preserving identity,

emotions, and social bonds in family firms, the result shows that family firms use

debt more than non-family firms as a source of financing.

Previous research on family firms and their financing decisions are mostly related to

one or two dimensions of socioemotional wealth. Many scholars,for

instance,discussthe role of preserving control in financing activities of family firms

(Romano et al., 2001; Sirmon & Hitt, 2003, de Visscher et al., 2011; Zhang et al., 2012;

Tappeiner et al., 2012; Wu et al., 2007). In case of preserving the company to pass it

to the next generations, Sirmon and Hitt (2003), Zellweger et al.(2011b), and

55 | P a g e

Lumpkin and Brigham(2011)discuss how the longer time horizon make different

financing decisions in family firms. Some scholars explain how keeping identity,

reputation, and social relations provide the family firms with less expensive debt

which alter their financing decisions (Croci et al., 2011; Anderson et al., 2003; Chua

et al., 2009). Finally some authors such as Astrachan and Jaskiewicz (2008) explain

the role of emotions in pricing and use of external sources of financing in family

businesses. What is unique about this research is that it contains the role of all

dimensions of socioemotional wealth in explaining financing decisions of family

firms.

Another contribution of this research is related to family effect measurement.

According to Berrone et al. (2012) there is little work on how to measure the

dimensions of socioemotional wealth. As a result they have presented an instrument

to measure the dimensions. However, Berrone et al. (2012) mention that there are

some secondary proxies such as ownership which are valid proxies for

socioemotional wealth. For example, according to Berrone et al. (2012), as family

ownership increases identification and emotional bonds, personal attachment, and

control dimension of socioemotional wealth increases. This research, by showing

that socioemotional wealth causes different financing choices by family firms,

presents another secondary proxy to measure socioemotional wealth. Since the

relationship is confirmed to some extent, financing decisions in family firms can be a

proxy to measure the level of socioemotional wealth and intention to preserve it in

family firms.

As mentioned above, there are some works on financing activities of family firms,

this research can contribute to the field both in theoretical approach, which is

discussed above, and empirical approach. In case of empirical approach, although

the models in this research has no specific advantage over what is used in others’

research such as Romano et al. (2001)’s work, by using different models, this

research is another empirical study which adds to the existing knowledge. In the

models preference for different sources of financing is the dependent variable and

56 | P a g e

in addition to control variables and moderating variables, being a family firm is the

independent variable. It has also examined the moderating effects of firm age and

firm size which is not done previously in this context.

In addition to academic contributions, the result can be helpful to practitioners and

financiers. They should consider the role of different dimensions of socioemotional

wealth in family firms. They can consider the importance of keeping control and

transgenerational control in family firms. They can, therefore, offer financing

packages to family firms which take less control from family firms in order have

more customers. Additionally to preserve identity, emotions, and social relations,

family firms are more eager to keep their good image as a result they can be viewed

as more reliable customers to bankers. This is, in fact, practiced by many lenders

already (Chua et al., 2009). If family firms are older and next generations control the

firm, however, family firms become more similar to non-family firms so the

importance of socioemotional wealth decreases, as the result of this research shows.

Knowing all these factors financiers can design more appropriate packages to offer

to family firms.

5.4. Limitations

Although some resultsare consistent with the hypotheses, some other hypotheses

are not supported. There is no evidence for the hypothesis that family firm have less

preference over external sources of financingin general. To explain this fact, some

other theories could be more investigated. The negative relationship between family

effect and cost of capital is one of those theories (de Visscher et al., 2011). Family

firms have more family effect clearly. So they have more access to less expensive

capital and use more of them than non-family firms. Value of advice presented by

Smith et al. (2011) is another explanation. In this research the value of advice of

external sources of financing is also underestimated.

In addition one item related to debt did not have a significant coefficient for being a

family firm. The dependent variable in the referring models is Other Kinds of Debt.

57 | P a g e

One reason that caused the non-significant coefficient can be the fact that

respondents did not know the meaning of Other Kinds of Debt. Although in the

questionnaire it is clearly mentioned that “They might be government loans, asset

based lending, trade credit, publishing bonds, or any other source, borrowing from

which is important to your company” in order to minimize the confusion of

respondents and maximize research reliability, if some of them were separately

asked the result could be better.

In spite of the fact that the main question of this paper is whether family and non-

family businesses are different in their choice of financing, there are four

hypotheses which are related to the impact of other factors which arefirm size and

firm age. The results do not support the hypotheses about the moderating effect of

firm size on the relationship between being a family firm and preference for

different sources of financing. This cast doubt on the arguments led to the

hypotheses about firm size. The arguments claim that small firms have less access to

capital market (Chittenden et al., 1996) comparing to large firms. Result shows that

this fact does not necessarily mean that firm size has a moderating effect on the

relationship between being a family firm and using different sources of financing.

The arguments have limitations in explaining the result. However in discussion

section of this chapter a counterargument that is in line with result is discussed.

In case of moderating effect of firm age, most results are not significant and those

which are support hypotheses. One limitation of this paper is that many coefficients are

not significant.Figure 4.18 shows this fact. Not only coefficients, but most of models

which have external sources of financing as their dependent variable are not meaningful.

The best model of Venture Capitalists, for instance, has the adjuster R square of -0.038.

As a result better models could be generated in case of some sources of financing and

moderating effects, in order to discuss research problem in a better manner.

Another factor that limits this research is that data is gathered only from Swedish

companies. Each country, including Sweden, has its own special capital market and

financing culture. Considering this, generalization of the result of the research can

58 | P a g e

be problematic. It also targets only the companies which have a website. As a result

some companies, family and non-family, which do not have a website, are neglected.

So it can be said that sampling could be done in a better way.

5.5. Future Research

The result and limitations of this research show that there are some other issues

that can be further investigated. Firstly this paper shows the role of different

dimensions of socioemotional wealth in choosing financing sources in family firms.

Future research can focus on the role of socioemotional wealth dimensions, as a

whole or in particular, on other decisions in family firms. For example one research

can be dedicated to examine the impact of preserving identity in family firms on

marketing strategies of family firms.

Additionally, the impact of each dimension can be examined on financing decisions

of family firms. Berrone et al. (2012) introduces an instrument to measure each

socioemotional wealth’s dimension. Using the instrument future research can be

dedicated to measure the impact of any particular dimension of socioemotional

wealth on financing activities of family business. Although this research discussed

several works in which any of socioemotional wealth dimensions were related to

financing activities, there is no work in detail about only that dimension. In other

words one can focus on, for instance, preserving emotions in family firms in detail,

measure it with the tool introduced by Berrone et al. (2012) and find its relationship

with financing activities.

According to Berrone et al. (2012), instead of direct measurements of

socioemotional wealth dimensions, secondary proxies such as family ownership are

also an alternative to measure family effect. In this research being a family firm is a

yes/no question. To study the issue in more detail the next suggestion is to see the

impact of degree of being a family firm on preferences for different choices of

financing. For example, one can study the impact of family member percentage of

top management team on choices of financing in family firms. The percentage of

59 | P a g e

family ownership can be another factor to measure degree of being a family firm

(Chua et al. 1999; Berrone et al., 2012). Role of direct or interacting impacts of other

factors such as CEO being a family member in financing decisions can be also

examined.

As discussed in the last section, the result does not fully support the hypothesis

about choice of external sources of financing in family firms. So the next issue which

worth being examined further is the role of external sources of financing in family

firms. What are the important issues for family firms when they intend to choose

private equity as a source of financing? Do they have access to lower cost capital as

de Visscher et al. (2011) claim? Is external advice and monitoring as valuable as

what Smith et al. (2011) state, to family firms? What is the role of intention to keep

control and passing the company to the next generations on choosing external

sources of financing in family firms?

***

“A business that makes nothing but money is a poor business.”

Henry Ford

60 | P a g e

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Appendices

Appendix 1: The Questionnaire

Questionnaire

This questionnaire is used as a research tool in order to gain knowledge about choice of financing in

family and non-family firms. Your responses will be used only for research purposes and they will be

kept confidential. The questionnaire consists of 3 sections which involve 24 questions. Please answer

the questions with the best of your knowledge. We appreciate the time you spend to fill in the

questionnaire. Once again thanks for participating. If you have any question please contact us.

Section 1: General Information

1. How many employees work in the firm?

2. How many years passed since the firm is established?

3. Please indicate the industry in which the firm operates.

Agriculture

Mineral Industries

Construction

Manufacturing

Transportation, Communications and Utilities

Wholesale Trade

Retail Trade

Finance, Insurance, and Real Estate

Service Industries

Public Administration

Other:

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4. What is the type of the organization?

Private

Public

Section 2: Family Involvement

5. Is your firm a family business (i.e. two or more founding family members or descendants involved

in the business)?

Yes No

6. What is the percentage of family ownership?If the answer to questions 5 is 'No', please go directly

to section 3. If the answer to question 5 'Yes', please continue in this section.

7. How many family member present in the management(CEO, President, Officers, or the top three

people in the business)?

8. How many non-family people present in the management(CEO, President, Officers, or the top three

people in the Business)?

9. Is the CEO a family member?

Yes No

10. What generation is currently managing the daily operations of the family business? The

founder(s)’ generation = 1

Section 3: Financing Options

In questions 11 to 21, please identify in the last five years how important each of the following

sources of financing was for the company.

11. Friends and family investments...Investments made by friends and family. This does not include

loans which ask for interest rate. Instead they ask for share or reduced or free rent.

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Very Important

Important

Moderately Important

Of Little Importance

Unimportant

12. Bootstrapping...Finding ways to avoid the need for external financing through creativity,

ingenuity, thriftiness, cost-cutting, obtaining grants, or any other means.

Very Important

Important



Unimportant

13. Current Shareholders...Re-investments by current owners. This includes unpaid dividends also.

Very Important

Important



Unimportant

14. Leasing...To allow somebody to use a property for a specific period of time in exchange for

payments.

Very Important

Important


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Unimportant

15. Angel investors...Individuals who invest their personal capital directly in start ups.

Very Important

Important



Unimportant

16. Venture Capital firms...Venture Capital firms are limited partnership of wealthy individuals,

pension plans, university endowments, foreign investors, and similar sources that raise money to

invest in growing firms.

Very Important

Important



Unimportant

17. Strategic partners...To receive financial, marketing, distribution, and other kind of support from a

partner company in exchange for a specialized technical or creative expertise.

Very Important

Important



Unimportant

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18. Public Offerings...Sale of stock to the public.

Very Important

Important



Unimportant

19. Lending from commercial banks...Bank loans.

Very Important

Important



Unimportant

20. Lending from family and friends...To ask family and friends for loans; which means no share of

the company is offered; instead the principal and maybe some interest should be paid back.

Very Important

Important



Unimportant

21. Other kinds of loan...They might be government loans, asset based lending, trade credit,

publishing bonds, or any other source, borrowing from which is important to your company.

Very Important

Important

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Unimportant

22. If there were other sources of financing which were important to your business in the last 5

years, please specify them.This can include: government grants, franchising, acquisition, or any other

source that you think is important to your company.

23. Do you agree with the following statement? The financial needs of the business were urgent in

the last 5 years.There were immediate needs for financing during the last 5 years.

Strongly Agree

Agree

Undecided

Disagree

Strongly Disagree

24. Do you agree with the following statement? The financial needs of the business were large in the

last 5 years.The firm needed large amounts of money during the last 5 years.

Strongly Agree

Agree

Undecided

Disagree

Strongly Disagree

Note: The questionnaire in published online at:

https://docs.google.com/spreadsheet/viewform?formkey=dHczOC1uZDJWaV9qbmF5dXpD

MlJIZ0E6MQ

https://docs.google.com/spreadsheet/viewform?formkey=dHczOC1uZDJWaV9qbmF5dXpDMlJIZ0E6MQ

https://docs.google.com/spreadsheet/viewform?formkey=dHczOC1uZDJWaV9qbmF5dXpDMlJIZ0E6MQ

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