Keeping it in the family: financial constraints and the succession intention of micro and small enterprises in China

Abstract

Despite the significance of business succession in the family firm literature, few studies have paid attention to the role of financial constraints, a common feature of micro and small firms, in entrepreneurs’ succession intention. Using a nationally representative survey of micro and small firms in China, we find that a higher degree of financial constraints significantly strengthens the entrepreneur’s intention of passing the firm on to the next generation. Moreover, the effect of financial constraints works particularly for firms whose entrepreneurs possess lower levels of financial literacy and for firms in regions with less-developed financial markets. Our results still hold after addressing potential endogeneity problems and conducting a wide array of robustness checks.

KEYWORDS:

• Succession intention
• financial constraints
• financial literacy
• micro and small enterprises
• China

JEL Classifications:

• D92
• G32
• M13

Acknowledgements

The authors greatly appreciate the comments and suggestions given by Caoyuan Ma, Randall Morck, Wentao Ma, Yi Zhang, and the seminar participants at the School of Economics and Finance of Xi’an Jiaotong University. All errors remain our responsibility.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Cai and Feng (2021) provide a comprehensive review of the social and economic consequences of China’s one-child policy.

2 In their seminal paper, Greif and Tabellini (2017) claim that during the last millennium, China has relied on the Confucian clan to achieve interpersonal cooperation while the West has emphasized cooperation beyond kinship and developed impersonal institutions, which leads to the divergent institutional development trajectories in China and the West.

3 We thank the editor for this valuable suggestion.

4 We also experiment with different quantile criteria in the definition of financially constrained firms and find consistent evidence. Results are available upon request.

5 For robustness, we also try the IV probit method for the IV regressions. The results are quite similar to those reported in the paper and are available upon request.

6 Oster (2019) suggests that in many cases an appropriate bound for the coefficients of proportionality (δ) is one, as researchers typically include controls that are supposed to be the most important.

7 We also examine the reduced-form regressions and find a negative and significant relationship between our IV and entrepreneur’s succession intention. Results are available upon request.

8 Many empirical studies have used this method to deal with the endogeneity problem when external instrumental variables are not available (Arcand, Berkes, and Panizza 2015; Deuflhard, Georgarakos, and Inderst 2019; Grohmann, Klühs, and Menkhoff 2018).

9 Results of the first-stage estimates are available upon request.

10 Results of the test on the effectiveness of the matching procedure are available upon request.

Additional information

Funding

This work was supported by the Humanities and Social Science Program sponsored by the Ministry of Education of the People’s Republic of China [grant number 18YJA790041].

Notes on contributors

Kong-lin Ke

Kong-lin Ke is a Professor of Finance at the School of Finance, Zhejiang Gongshang University. His research interests include inclusive finance, monetary economics, and financial risk management.

Xiaohui Hou

Xiaohui Hou is a Professor of Finance at the School of Economics and Finance, Xi’an Jiaotong University. His research interests include financial institutions and markets, inclusive finance, monetary economics, and corporate finance.

Chun Liu

Chun Liu is an Assistant Professor of Economics at the School of Economics, Southwestern University of Finance and Economics. His research interests include corporate finance, culture and institutions, and economic development.