To What Extent Has Financial Slack an Impact on the Risk-taking the Behavior of Family Firms

Class

Institution Affiliation

Main waves, theories, and ideologies

According to Huybrechts (2013), agency theories have provided a suggestion that involvement in risk-taking and nature the risks taken depends on the management and the ownership of the business firm. In privately owned business, the Chief Executive Officer of the firm can provide significance influence in the risk taking and the entrepreneurial behavior. Huybrechts further argues that entrepreneurial management can be viewed in two dimensions. First, the owner-manager will be lenient on financial diversification of the capital resources leading to a moderate preference for expanding in new projects. Secondly, outsider-manager has little or no financial burden and can consistently engage in significant entrepreneurial risks

Hicheon (2008), presents a wave of dramatic changes that have been witnessed by Korea since 1997. With the irregular corporate governance and enforcement of law, Korea has become that leader in controlling family owned businesses. Availability of financial slack gives a firm a better chance to autonomously use its resources in exploring new projects and opportunities in the risk-taking process. Heechun (2008), suggests that availability of more organizational resources enable a firm to participate in risk taking, experimentation, and innovation. With the increasing need for bigger risks appetites, family firms have been facing a challenge over a series of time and have resulted to utilizing disposable finances in positioning their businesses in the market.

Gomez-mejia (2007), Uses behavioral theory to analyze the investment nature of family-owned firms. He argues that the primary reference as to why family-owned businesses are averse to taking risk is due to the fear of losing their socioeconomically gained wealth. To avoid this loss, families are seen to have a risk appetite that does not endanger their full financial deposits and capabilities. Using a population of 1,237 families managed and owned oil businesses, the author confirms the predictions of the behavioral theory being dependent on the decisions regarding the loss of household socioeconomically gained wealth by the family management.

Comparison of the pieces of literature

All the works of literature heavily borrow from the behavioral theory and acknowledge the major impendent to taking a bigger risk in family-owned businesses is the family itself. According to Hicheon et al. (2008), family management will not sufficiently deploy available resources to new programs due to fear of losing family capital. The literature concurs that the outsider-manager has more pressure...