“Entrepreneurial orientation, control aversion and performance in SMEs: the contribution of equity investors”

Entrepreneurial orientation is a concept that captures the importance of how and why certain individuals decide to take higher risks than the average small business owner so as to increase their return on assets deployed. Entrepreneurial orientation is linked to the concept of control aversion, which is used to explain why certain individuals refrain from using external financing to expand their firms. Control aversion suggests that most small business owners prefer to maintain total control rather than invite in the potentially disruptive influence of an external owner/investor. This study combines these two concepts in an attempt to introduce financing and investors into the discussion of entrepreneurial orientation and performance. Equity investors are shown to have a major influence on entrepreneurial performance, because business owners with an entrepreneurial orientation gain substantially from interaction with investors through the transfer of knowledge. The model was tested with a LInear Structural RELations (LISREL) analysis on a sample of 459 Swedish small and medium-sized enterprises.


Introduction 
The view that small firms and entrepreneurs are becoming increasingly important in the modern economy is firmly established (Acs and Audretsch, 2003; Gohmann, 2012; Reynolds et al., 2000). Two major challenges in supporting small firms and entrepreneurship are the lack of coherence within the small business population and the lack of understanding of the motives of small business owners and entrepreneurs (Mole, 2004). Crosscountry analyses have revealed that small firms use less external financing than larger organizations, yet, these firms benefit the most from such financing (Beck et al., 2008). The mind-set of small business owners is evidently important and has resulted in a discussion about the difference between entrepreneurship and small business. This debate is certainly not new, but the field is moving forward, as different variables influencing entrepreneurial orientation are developed (see Wiklund et al., 2009;Covin and Miller, 2014). The environment has been determined to be important, partly because an entrepreneurial orientation can develop over time. This study explicitly examines entrepreneurial orientation and external investors. The research on control aversion (Cressy andOlofsson, 1997, Berggren et al., 2000;González et al., 2013) is similar to that on entrepreneurial orientation in its emphasis on how small business owners change their behavior according to experiences and exterior conditions. Together, the two sets of theories suggest that entrepreneurial orientation is related not only to performance and growth, but also to close investor relationships, as investors become more important in industries where entrepreneurial orientation is a necessity. This study supports the general theory that entrepreneurial orientation and performance are linked, but adds the vital concept that entrepreneurial orientation fosters closer relationships with investors and, thereby, knowledge transfer. Researchers have found that most small business owners have a small business orientation (Smart and Conant, 2011) and that entrepreneurial orientation is a strategic choice (Covin and Miller, 2014), as is small business orientation (Runyan et al., 2008). Fuller and Moran (2001) put forward the notion of small businesses as part of a complex environment in which they adapt to different circumstances as they arise. This adaptation to the environment, especially in terms of a willingness to operate outside of expected behavior, could ostensibly be called an entrepreneurial activity, but the definition of such an activity remains unclear (Davidsson et al., 2002). The complex environment presents not only unique possibilities for the entrepreneur, but also limitations in the sense that some industries require massive external financing for small businesses to survive (Baldwin and Gellatly, 2003).

The investor perspective.
One of the most perennial issues on the financing of small business investments is the problem associated with information asymmetry and the resulting agency costs (Jensen and Meckling, 1976). The basis for information asymmetry is that small businesses are, in general, more opaque organizations than are larger firms (Hall et al., 2000;Hsu, 2004;Schmid, 2001). Informational opaqueness is a considerable obstacle when overcoming information asymmetry in the relationship between financiers and entrepreneurs (Berger et al., 2001;Ortiz-Molina and Penas, 2008). The simple solution to information asymmetry is to obtain more information, but this is where the interests of investors and investees clash. Investors need more information to overcome information asymmetry; however, investees are reluctant to relinquish control. Control aversion is a concept that is aligned with the discussion of information asymmetry to the extent that investors want to secure their investments by increasing control so as to handle information asymmetry and avoid problems with moral hazard. Small businesses generally want to avoid these external control mechanisms. One of the most obvious means of avoiding external control is dealing with investors and financiers who use less constraining means of control; this provides the basis of the pecking order theory. Evidence for such a theory is inconclusive, with studies alternately finding support for or insubstantial evidence of the pecking order hypothesis (Frank and Goyal, 2003;Leary and Roberts, 2005; Shyam-Sunder and Myers, 1999).
Control aversion may be seen as a primarily attitudinal reaction, but it is also clearly dependent on the available resources (Davidsson and Honig, 2003;González et al., 2013). The utilization of scarce resources is a primary determinant of entrepreneurial orientation (Zahra et al., 2006), and financing is a basic resource needed by most growing firms (Hartarska and Gonzalez-Vega, 2006). The attitudinal aspect of control aversion makes it similar to the concept of entrepreneurial orientation in that there is a choice to be control averse. On the basis of earlier research, it can be presumed that most firms have a small business orientation and are control averse. Given a choice, small business owners will choose to remain in full control. Madsen (2007) made the connection that small businesses need to acquire an entrepreneurial orientation to compete and, thereby, to achieve high growth. This finding implies that, in industries characterized by high growth, there is a substantial cost to remaining control averse, and, ultimately, the survivability of such enterprises will decrease in industries where rapid growth is necessary. Abandoning control aversion can also be seen as an indication of an entrepreneurial orientation in the sense that there are risks associated with losing control (McGrath, 2001).

Entrepreneurial orientation.
The relationship between entrepreneurial orientation and performance has been established (Lumpkin and Dess, 2001;Wiklund and Shepherd, 2005), as has the relationship between entrepreneurial orientation and growth (Wiklund et al., 2009;Wiklund and Shepherd, 2003). So far, research has focused more on the characteristics of the entrepreneur than on the environment. Entrepreneurial orientation is largely a matter of preparedness to adapt to market conditions, that is, being proactive and innovative. Market orientation is a concept that is closely connected to entrepreneurial orientation in that both concepts advocate being proactive and flexible to reach given targets. A firm showing an entrepreneurial orientation in adapting to changing market conditions is seen as more proficient in attracting customers and long-term business (Agarwal et al., 2003;Lukas and Ferrell, 2000;Vázquez et al., 2001). As is the case with entrepreneurial orientation, market orientation is viewed as being dependent on organizational capabilities (Harris, 2000(Harris, , 2002. Entrepreneurial orientation is, furthermore, dependent on the managerial qualities of the small and medium-sized enterprise (SME) (Koeller and Lechler, 2006). Because management of human capital is considered a prognosticator of success for small firms (Cressy, 2006), it can be deduced that entrepreneurial orientation is correlated with performance. However, entrepreneurial orientation is not necessarily correlated with the ability to obtain financial resources. Banks, in particular, are not necessarily more eager to provide capital on the basis of entrepreneurial orientation and innovativeness. In fact, entrepreneurial orientation may hinder the ability of a small firm to generate credit, instead, forcing the small firm to seek new investors (Freel, 2007). Private equity investors, by contrast, are attracted by entrepreneurial orientation and innovativeness. In particular, informal investors, such as business angels, are likely to emphasize "soft" factors in evaluating prospects and are more closely linked to the entrepreneur than venture capitalists and commercial banks (Paul et al., 2007). On the basis of these findings, we hypothesize that entrepreneurial orientation is correlated with higher profits and with the likelihood of informal investors committing to a relationship with the firm.

H1:
The stronger the entrepreneurial orientation of a small business owner, the more likely investors will be committed to a relationship with the SME.

H2:
The stronger the entrepreneurial orientation of a small business owner, the more profitable the firm will be.

Investor commitment.
The commitment of financiers is largely dependent on the economics of finance. In recent years, the financial landscape has changed such that financiers -particularly commercial banks -increasingly use hard quantitative information to evaluate small businesses, resulting in a decreased exchange of information and, ostensibly, a decreased level of exchanged information ( Commercial banks increasingly view small business as customers to be handled without much human intervention. The opaqueness of small businesses -particularly service firms -is a detriment in the process of evaluation. This opaqueness can be handled in different ways, most commonly through the use of close relationships to obtain more information or the reliance on statistical databases to help to predict the relationship outcome. The same phenomenon can be seen in the venture capital industry, where there is a clear link between the ownership structure and governance of venture capital firms and the level of advice provided to portfolio firms (Cumming et al., 2008). Banks and venture capitalists rely on contracts to resolve these problems, whereas business angels usually increase their presence at the site of operations H3: The greater the investor commitment, the greater the influx of financial expertise development from the new investor will be.

Financial expertise development.
The need for small businesses to obtain advice has increased over time (Ramsden and Bennett, 2005). As is the case with entrepreneurial orientation and control aversion, acceptance of advice from external parties can be learned over time (Lybaert, 1998). Research on advice has found that "soft" advice is perceived to be more important than other kinds of advice (Turok and Raco, 2000). This finding implies that the relationship between the advisor and the advised needs to be close and personal to enable knowledge transfer. Accepting advice has been seen as a process of alignment and adjustment on the part of the advised party (Wyre et al., 2000). Obtaining advice from outsiders results in an increased formalization of plans, in part because the small business must articulate its situation to financiers. This, in turn, implies stronger strategic planning, which research has shown to influence performance positively (Chandler et al., 2005;Delmar and Shane, 2004;Honig et al., 2005). Financial expertise development, in the form of improved accounting techniques and improved corporate governance, has been shown to enhance profitability and growth for firms that depend on external financing (Benfratello et al., 2008;Rajan and Zingales, 1998). One of the most important effects of financial expertise development is the provision of knowledge regarding how small businesses can enhance liquidity through internal reorganization and the discovery of new sources of financing. In addition, the informed small business will be able to implement advice provided by external actors to a higher degree (Shin and Kolari, 2004). Investors focusing on deal origination as a means of differentiation will be more able to engage in information exchange with small businesses (Wright and Lockett, 2003). It can be hypothesized that these types of actors are, therefore, better able to support the implementation of financial expertise development. At the same time, research shows that early-stage financiers -whether banks (Carter et al., 2004) or private equity investors (Cumming, 2006) -engage in more relationships out of a portfolio strategy. On the basis of this research, our final hypothesis posits that the contribution of knowledge resulting in financial expertise development will lead to increased performance for the entrepreneurial firm.

H4:
The higher the perceived financial expertise development of the investor, the more profitable the investee firm will be.

Sample and response rate.
There is no universal definition of small and medium-sized firms (Storey, 1994); hence, researchers seem to use a wide variety of definitions. In surveys, the definition used is generally some measure of sizeusually turnover or number of employees. In this paper, we define SMEs as firms that have fewer than 200 employees and are not part of a corporate group. This definition is compatible with the quantitative definition put forward by Bolton (1971) and is also in line with earlier Swedish research (Cressy and Olofsson, 1997; Davidsson, 1989).
The survey was sent to the chief executive officers (CEOs) of 1024 firms. Of the 1024 surveys sent out, 459 were returned, giving a response rate of 44.8%. The questionnaire focused on the background characteristics of the firms in the sample, the entrepreneurs' control aversion and attitude toward growth, the entrepreneurs' attitude toward their most important financiers, and the contribution of these financiers to the development of the firm.
The survey was targeted toward two industries: manufacturing and business services. Manufacturing was chosen because of the historic importance of this industry in the Swedish economy in terms of employment and exports. Today, the manufacturing sector still constitutes the backbone of the Swedish economy. By contrast, business services have emerged as the fastest growing industry in recent decades. Outsourcing from more traditional industries is partly responsible for driving this growth. Table 1 presents some basic characteristics of the firms in the sample. Note: a MSEK, million Swedish kronor; 8 SEK is roughly equal to 1 USD.

Non-respondents.
Because a relatively large number of CEOs did not complete the questionnaire, we conducted three dropout analyses. When selecting the companies for the sample, we obtained background data on their characteristics from Statistics Sweden. Thus, the first step was to compare respondents with nonrespondents with regard to age, location, primary industry, secondary industry, and number of employees. We did not find any statistically significant differences between the respondents and non-respondents. The second stage in the dropout analysis used a method first put forward by Armstrong and Overton (1977), who argued that late respondents and non-respondents share many characteristics (see also Churchill, 1991). Therefore, we divided the sample into early and late respondents and compared these two groups of firms. We found nothing that could indicate a statistically significant difference between the groups. The third stage of the dropout analysis was a follow-up of the non-respondents, which was carried out by contacting 150 firms by phone and mail. The CEOs were asked a number of central questions from the survey, and 67 CEOs answered the questions. Again, we were unable to find any statistically significant differences between this group and the respondents.

Analysis using LISREL.
We analyzed the empirical data using LInear Structural RELations (LISREL), a structural equation modeling technique that has been used for many years not only in social sciences research, primarily in marketing and internationalization research (see Bollen, 1989) The validity of the LISREL model is estimated using three levels of testing. The first level is nomological validity (i.e., the validity of the entire model) and indicates the fit between the model and the data. Nomological validity is assessed using the Chi-square and the degrees of freedom, together with a probability estimate (Jöreskog and Sörbom, 1993). There are no definitive measures for the Chi-square and the degrees of freedom, as Jöreskog and Sörbom (1993) pointed out. Some authors have concluded that the fit is good when the Chi-square and the degrees of freedom are approximately the same.
Other authors (see Bollen and Long, 1993) have concluded that it is difficult to apply such a rule of thumb. In the probability estimation, the p-value of the model must be greater than 0.05 to be valid at the 5% level. A number of other measures for assessing nomological validity have been suggested, but, according to Jöreskog and Sörbom (1993), these measures are all functions of the Chi-square. Among the more frequently used measures are the comparative fit index (CFI), which checks for non-normal distributions and should be close to 1; the goodness-of-fit index (GFI), which checks for sample size effects and should be over 0.90; and the root mean square error of approximation (RMSEA), which measures the discrepancy per degree of freedom for the chi-square distribution and should not exceed 0.08 (Bollen, 1989;Jöreskog and Sörbom, 1993). Other kinds of fit indexes that measure how much better the experimental model fits the data compared with a baseline model -usually the independence model -are the normed fit index (NFI) and the non-normed fit index (NNFI) (Jöreskog and Sörbom, 1993); the values for these indices should be close to 1.
The second level of validity assessment is discriminant validity, which checks the separateness of the constructs. This type of assessment can be performed in two steps (Jöreskog and Sörbom, 1993). First, we check that the constructs are not correlated with each other, which is carried out by forming an approximate confidence interval that is equal to twice the standard error (Anderson and Gerbing, 1988;Jöreskog and Sörbom, 1993). All values that fall within this confidence interval are not significantly different from the correlation coefficient. Second, discriminant validity can be assessed by checking the modification index. The modification index suggests changes if the indicators are related to more than one construct.
The final test for validity is convergent validity, which checks the homogeneity of indicators and their constructs. Convergent validity is assessed with three estimates: coefficients, t-values, and R  -values. The coefficients represent the strength of the relationship between two variables (Bollen, 1989). There are no definite limits for coefficients; rather, the values should be judged in association with the theoretical considerations (Jöreskog and Sörbom, 1993). The t-values represent an estimate of the statistical significance; to be statistically significant at the 5% level, the t-value should exceed 1.96.
The R 2 -values are an estimate of the linear relationship between two variables (Jöreskog and Sörbom, 1993). As is the case with coefficients, there are no definite limits for an acceptable R 2 -value, but a rule of thumb is that R 2 -values should exceed 0.20 (Bollen and Long, 1993).
Because it is debatable whether it is appropriate to use maximum likelihood estimation when dichotomous variables are used, we also used a generalized least squares estimation. The result of this calculation was, in all respects, the same as the result obtained with the maximum likelihood technique. This result was not surprising, because Mattson (1998) has shown that LISREL is a very robust technique even when there are deviations from the normal distribution.

Results from the study
The results of the analysis showed that nomological validity was secured; the p-value of 0.15 indicated that the model as a whole was valid (Chi-square, 15.89; degrees of freedom, 11). Likewise, the CFI, GFI and RMSEA values also indicated a good fit between the model and the data (1.00, 0.99 and 0.031, respectively). The NFI and NNFI values indicated that the model was robust (0.99 and 0.99, respectively). Furthermore, the constructs within the model seem to be strongly correlated. The second stage in the validity assessment is discriminant validity, which checks for the separateness of constructs. The modification index did not suggest any changes in the model (i.e., there were no cross-loadings). We made an approximate confidence interval for the factor loadings equal to twice the standard error; in no case did the values include 1. Hence, discriminant validity was secured in the model. Finally, we assessed the convergent validity; the coefficients, t-values, and R 2 -values are presented in Table 2. The correlation of the constructs, error terms, and t-values for the constructs are presented in Table 3.  On the basis of the idea that the theoretical concept of entrepreneurial orientation contains both a general reliance on investors and a measurement of control aversion, we measured entrepreneurial orientation with two indicators: the perception of new investors as being valuable and providing positive inputs for the firm (coefficient, 0.69; t-value, 11.38) and the perceived benefits of new equity over loans (coefficient, 0.54; t-value, 9.61).
In line with the reasoning presented earlier, we focused on the investor commitment, a single variable construct. Hence, we measured the actual financial commitment for a new investor -the investor. In the questionnaire, firms were asked whether a new investor was committed to the firm. The construct of entrepreneurial orientation was strongly correlated to the construct of commitment (coefficient, 0.62; t-value, 10.66).
In the questionnaire, we measured the financial contribution of the financier with two indicators: the perceived contribution to the financial competence of the firm (coefficient, 0.85; t-value, 19.63) and the perceived focus that the financier has helped to put on financial issues (coefficient, 0.86; t-value, 19.81). As posited, the level of commitment was indeed correlated with the influx of financial competence (coefficient, 0.48; t-value, 9.64).

Discussion of the findings
Several ideas have emerged from research in entrepreneurial orientation, including the concept of entrepreneurial orientation as a choice (Runyan et al., 2008) and the impact of entrepreneurial orientation on growth (Wiklund et al., 2009). As entrepreneurial orientation research moves ahead, there is a substantial need to move beyond a focus on the cognitive beliefs of the entrepreneur to include a focus on the limitations imposed by the environment. In research on control aversion (Berggren et al., 2000;Cressy and Olofsson, 1997), there is a similar perspective, because control-averse small businesses share a similar mind-set to the small businessoriented individual. Taking this discussion even further, research in finance shows that entrepreneurial orientation is dependent on changes in financial industry practices. This study shows the importance of the outside perspective and the fact that external financiers greatly influence the relationship between entrepreneurial orientation and performance.
Our first hypothesis was the relatively straightforward assumption that entrepreneurial orientation has a significant effect on performance. This effect has been shown before (Lumpkin and Dess, 2001;Wiklund and Shepherd, 2005); therefore, it serves primarily to anchor this study within the field of research. The additional hypothesis that entrepreneurial orientation is correlated with investor commitment is more innovative. We decided to focus on new investors because of the known function of the financial sector. Entrepreneurial orientation is a necessity among small businesses in certain industries, where innovativeness and a higher level of risk taking are necessary to survive. These types of firms are generally not among those finding easy access to loan capital. In addition, formal venture capital has become more oriented toward larger firms, and both banks and venture capitalists rely less than they once did on personalized contacts in the firms with which they interact (Mayer et  In this study, we hypothesized that the commitment of external equity investors would primarily supply access to knowledge aligned with their function as financiers. Investors with backgrounds as entrepreneurs generally have access to a substantial business network and are able to transfer their experiences to the firm in which they invest (Politis and Landström, 2002;Reitan and Sörheim, 2000;Saetre, 2003). By accessing these networks, an entrepreneur can gain knowledge on how to obtain resources for expansion. A comparison can be made with other financiers who increasingly rely on database screening (Berger et al., 2005). Smaller financiers are more important than larger ones in providing close relationships (Dell'Ariccia and Marquez, 2004), because these financiers have a relevant network.
The final hypothesis was a correlation between increased financial expertise development and performance. Because our definition of performance is associated with financing, it is reasonable to argue that an enterprise that improves its knowledge substantially in terms of financial expertise development will be able to increase its performance. The emerging enterprise will be able to provide more accurate information for investors, which has been revealed to improve the chances of small firms gaining financing substantially (Beck et al., 2006). Among the primary goals in applying financial expertise is to maximize the perception of the entrepreneur's personal commitment, which is among the most important components in deciding to finance small businesses (Ang et al., 1995;Avery et al., 1998) and in dissipating the information asymmetry between the financier and the entrepreneurial firm (Voordeckers and Steijvers, 2006).

Conclusions
We found our initial hypothesis to be valid. Our main goal was to complement the existing research on entrepreneurial orientation by using the theory of control aversion. Our results indicate the importance of equity financing in supporting entrepreneurial orientation and the role of entrepreneurial orientation in increasing the learning capacity of small businesses. Entrepreneurial orientation not only is connected to performance, as has been indicated by earlier research, but also opens up communication channels with important advisers. This study supports entrepreneurial orientation research while adding the dimensions of external advice and financial expertise development. In addition, this study deepens the understanding of control aversion and how control aversion can be connected to entrepreneurial orientation research. Together, these two approaches substantially enhance our understanding of entrepreneurial finance. This study also highlights the importance of informal equity investments and, thereby, reinforces the notion of the importance of informal equity investments in promoting entrepreneurial businesses and the growth of the small business sector (Wiklund et al., 2009). Parallels can be drawn to institutional complementarity research (Boyer, 2005;Gagliardi et al., 2009), which emphasizes the role of different financial institutions in developing small business financing and growth.