10 Apr 2017

Influence of Financial Slack on Risk-Taking Behavior for Family Firms (Analysis Paper)

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Critical Analysis of the Methodology

The researchers used empirical data drawn from firms’ surveys, private organizations, and government databases with a focus on the firms’ ownership structures, management procedures, growth, and topics on strategic development. The researchers found these source important because it was easier to determine the effects of a range of external factors on the dependent variable (family risk-taking behavior). It was, however, difficult to control data variability since there were several outliers and this, to some level, compromised the validity of the information presented by these sources. Therefore, the method of investigation is criticized following the large variations in family firms’ performances, which indicates that business actors are more than willing to pursue new business opportunities with the objectives of increasing performance outcomes. However, other researchers such as Gómez-Mejía et al. (2007) used secondary data stored by olive oil firms. Information relating to the performance of family firms and other business agencies were retrieved from government official registries. The researchers found this source credible because the registries are updated annually with the correct information on both private and public business performances. However, the researchers did not find adequate information because the source did not give details of percentage ownership by individuals. Following these limitations, it would have been more prudent for the researchers to engage in primary investigations, seek the opinions of business owners, and engage in both quantitative and analysis of the information given by the respondents. Survey questions would have been developed based on the objectives of the study and sent to individual firm for investigation.

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Gaps in Research

In summary, the literature findings revolve around three important theories; agency theory, prospect theory, and behavioral agency model (Wiseman, & Gomez-Mejia, 1998). It is, however, clear from the literature analysis that the majority of the researchers used the behavioral agency model to explain the influence of financial slack on the risk-related behavior of family firms. Following the behavioral agency model, we can conclude that financial slack is a problem of internal corporate governance and can be used to explain the risk-taking behavior of executive managers and business owners. The authors have successfully demonstrated that financial management and risk-taking behaviors vary across family businesses and this could be one of the reasons why risk-taking behaviors and monitoring approaches vary across family businesses. The only gap identified during literature analysis is that the studies did not develop precise propositions that can be used to combine monitoring with the financial performance so that there is the easy framing of strategic challenges. As a matter of fact, family firms should explain their choices of strategic risks. In this study, therefore, it will be necessary to use the available pieces of evidence in developing propositions for combining monitoring with financial performance. Through such propositions, it will be easier for family firms to enhance and extend their operational base so that there is an opportunity for improved risk management.

Apart from financial slack, business owners and managers must recognize other factors that affect risk management decisions because they may also have significant effects on future performances.  For instance, GomezMejia, Makri, and Kintana (2010) found out that a factor such as diversification decision of owners and managers demonstrate that SMEs fear to diversify their operations locally and internationally compared to non-family managed firms because of their lack appropriate strategies for diversification. This argument is different because it does not touch on financial slack or any challenge relating to financial slack. It is also evident from the authors’ point of view that those firms that have succeeded in diversifying their business activities mostly opt for domestic market with less regional operations. Unlike in the case of financial slack, it becomes clear that most family businesses prefer to diversify in situations where there is an increase in business risk.

Conclusion

According to “behavioral theorists,” owners and managers can use past financial performances of family firms to examine both the short-term and long-terms performance expectations. Where a family firm is satisfied with the past financial performance, there is a tendency to remain risk averse and enhance current business activities with the goals of improving future outcomes. The ideas presented by “behavioral theorists” find support from “strategic reference points theorists” who hold the view that heterogeneity in financial risk aversion is the only way family firms can ensure positive influence on future business outcomes. However, strategic reference theorists present contrary opinions regarding the risk-related behavior of family firms and future performance expectations. According to these theorists, strategic roles of business owners and managers can have significant effects on the family firms’ entrepreneurial behaviors and risk management approaches. Moreover, exclusive ownership seems to have a positive association with owners’ preference for business activities; an effect that can be used to determine family response behavior towards hazardous business conditions.

 

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