OWNERSHIP STRUCTURE, BUSINESS GROWTH AND FINANCIAL PERFORMANCE AMONGST SMEs FROM AUSTRALIA’S BUSINESS LONGITUDINAL SURVEY

The principal objective in this paper is to examine in some depth the relationships between ownership structure, business growth and financial performance amongst small and medium-sized enterprises (SMEs) with different degrees of overlap between management and ownership. The research employs panel data for 1,872 SMEs legally organised as proprietary companies, taken from the Australian federal government’s Business Longitudinal Survey for three financial years from 1995-96 to 1997-98. The study finds that there is no statistically significant relationship between the proportion of equity held by SME managers and achieved business growth in the businesses examined. Furthermore, for most financial performance measures examined, it would appear that there is no statistically significant relationship between the proportion of equity held by SME managers and achieved financial performance in the businesses examined. These findings are consistent with prior research on large business concerns. The findings can be seen as seriously challenging the relevance of agency theory in its application to smaller businesses. Introduction A theoretical perspective that has contributed significantly to modern financial theory is that of agency theory, which considers a business enterprise from the viewpoint of the various stakeholders it might have, and explores how their financial interests are furthered and protected in their dealings with each other. The stakeholder relationships that receive most attention in the small and medium-sized enterprise (SME) literature are those between: • Managers and owners. • Owner-managers and other owners. • Insiders (primarily owner-managers, other owners and managers) and outsiders (mainly creditors and lenders). The central dilemma in agency theory is that day-to-day control of an SME’s activities and financial fortunes very often rests in the hands of only some stakeholders who are usually managers or owner-managers. Yet all stakeholders have a legitimate expectation that their interests will be well served. By analogy with legal notions of agent and principal, those who