Family ownership and business expansion of small- and medium-sized Chinese family businesses: The mediating role of financing preference

The relationship between family ownership and business expansion is the subject of controversy among researchers. This article expands on the mediating role of financing preference in the context of family small and medium enterprises (SMEs) in China. In the research programme, the relationship between family ownership and business expansion was empirically examined using data collected from a survey of 206 Chinese family businesses in Henan Province. On one hand, the results show family ownership has a negative effect on a firm's total expansion level and a positive effect on a firm's internal financing preference (ratio of internal to external funds). On the other hand, we found an inverted U-shaped relationship between family ownership and a firm's annual expansion rate. The findings of this research generally indicate a complex relationship between family ownership and family business expansion: (a) Family businesses have a tendency to stagnate; stagnation is therefore a factor in the mediating role of financial preference on business expansion in size. (b) The presence of external equity partners may reduce the limitations of full family ownership; however, selling the majority of the firm is not an effective way to achieve rapid expansion.

► Family ownership has a negative effect on a firm's total expansion level and a positive effect on a firm's internal financing preference.
► An inverted U-shaped relationship exists between family ownership and a firm's annual expansion rate.
► External equity partners may reduce the limitations of full family ownership to a certain extent.