Conservatism: An Explanation of the Financial Choices of the Small and Medium Family Enterprise

The financial behavior of the family firm is a recurring topic in the literature. Hirigoyen's pioneer research (1984) reveals the specificity of the financial behaviors of industrial family medium-sized companies compared to those of the other categories of firms. This type of firms set out effective structures enabling them a better financial management because, on the one hand, they have a long term vision and, on the other hand, are not accountable for short-term results (Dreux, 1990), especially for unquoted firms. In addition, the desire to transmit the firm to the next generations would more encourage the effective management of capital (Gallo and Vilaseca, 1996). Precisely, the long-term horizons of the family firm make it possible to qualify its capital as "patient financial capital" (Reynolds, 1992). Indeed, this capital is invested for long periods without threat of liquidation contrary to "ordinary" financial capital which generally have a due limit corresponding to the end of investment (Dobrzynski, 1993). The firms having this type of capital would be able to pursue more creative and innovating strategies. Besides, family firms, of small and medium size especially, are characterized by the lack of financial resources. Ward (1987) observes that poverty in capital which is necessary to finance the needs of the family and the business is a factor which inhibits growth. Two explanations justify the lack of financial resources in SME. The first makes responsible the financial markets. Indeed, investors would be very hesitant as for investing in these firms (Mahérault and Lyagoubi, 2002). Many family firms SME are not able to meet the necessary conditions, or sometimes unwilling to set up the adequate organizational answers, to facilitate their access to the external capital (Davis and ali., 2000). The second explanation is about internal obstacles. To achieve its goal of durability, the family firm tries to evolve in a more or less hermetic universe. Accordingly, external financial intervention is avoided because it can deteriorate the independence of the firm. The small and medium family enterprise is characterized by a strong conservative attitude. How does conservative orientation influence the financial choices of the small and medium family enterprise? This theoretical contribution tries to answer this question. For Kreiser and ali. (2002), the family firm in general adopts a strategy of a conservative growth dedicating the "living company" model. Such a company consecrates long-term survival instead of financial performance as the main objective to be pursued. Accordingly, highly aware of its identity, it privileges financial conservatism and maintains a narrow control on strategic decisions in family hands. The analyzes of Hirigoyen (1985) join this idea since the author emphasizes that the industrial family SME does not furnish a true effort to increase its market share because it is mainly preoccupied by controlled growth. The analysis will be done in two steps. After pointing out the main dimensions of the financial conservatism of family SME: internal financing and avoidance of the external financial involvement, the analysis will explain the manifestations of conservatism and its sources. The paper will be concluded by reflections as for the strategies enabling to avoid, limit or even eliminate the impacts of conservatism.