The effect of business cycles on entrepreneurial control aversion and the search for external financing in SMEs

• This paper analyzes how different stages of the business cycle influence of level of control aversion displayed by entrepreneurs and how a changing economic climate affects financial search activity among small and medium-sized enterprises (SMEs). By using empirical data from three postal surveys, we analyze the financial search behavior of SMEs in Sweden of a ten-year period, 1991-200. We use a cluster analysis based on the level of control aversion displayed by the entrepreneurs and arrive at a four-cluster solution. The results show that when the economy turns downward, entrepreneurs are forced to become more active in searching for additional sources of finance. When the economy recovers, the control-averse entrepreneurs reduce their efforts in trying to obtain external financing. We also find that SMEs in rural areas have greater difficulties in attracting external financing than do SMEs in metropolitan areas. It might not be possible to generalize this study to other settings because it is based on the Swedish cultural and legal context. Nevertheless, we believe that the situation faced by entrepreneurs in different stages of the business cycle is fundamentally the same, irrespective of context. This study provides evidence that policymakers need to take into account the comparative advantages and roles of various financiers in the financial infrastructure surrounding SMEs. This paper fulfills an important role in analyzing the effect of a changing economic climate on the level of control aversion among entrepreneurs.

Subject headings

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv -- Företagsekonomi (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business -- Business Administration (hsv//eng)

Keyword

Business Cycles

Control Aversion

Entrepreneurs

Financing

SMEs

Publication and Content Type

ref (subject category)

art (subject category)