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ARE SMALL FAMILY FIRMS FINANCIALLY SOPHISTICATED?

1*

Alberta Di Giuli
ISCTE Business School
alberta.digiuli@iscte.pt

Stefano Caselli
Bocconi University
stefano.caselli@unibocconi.it

Stefano Gatti
Bocconi University
stefano.gatti@unibocconi.it

February 2011

Abstract

We study the drivers of financial sophistication in small family firms. Sophistication


is defined as the use of non-basic financial products such as options, swaps, debt
restructuring, and mergers and acquisitions (M&A) advisory services. Our analysis is based
on a unique dataset with detailed information on 187 Italian family firms. We find that the
main drivers of financial sophistication are: 1) the generation that currently owns the firm; 2)
the presence of a non-family CFO; and 3) the existence of a non-family shareholder. We
analyze the impact of these factors on the following four classes of non-basic financial
products: corporate finance, cash management, corporate lending and risk management. Our
results can be used to determine the characteristics of financially sophisticated family firms
and whether their corporate governance and ownership structure increase the use of non-basic
financial products.

JEL classification: G32; G21


Keywords: Family firms; Small firms; Financial products

*The authors thank Josh Lerner, John Doukas and seminar participants at the Conference of the International
Council for Small Business, Johannesburg June 2004, the 18th Australasian Finance and Banking Conference,
Sydney, December 2005, the 15th EFMA Annual Meeting, Madrid, July 2006, for helpful comments and
suggestions.

1
1. Introduction

This paper examines the adoption of financial products by small family firms (SFFs).

While most SFFs adopt a wide range of basic financial products (such as electronic fund

transfers, remote banking, international bank transfers, bill discounting, advances subject to

collection, and mortgages), only a limited number of SFFs utilize non-basic products (such as

mergers and acquisitions, leveraged buy-outs, management buy-outs and debt restructuring

advice, cash management, short money, factoring, financial leasing, syndicated loans,

commercial paper advisory and structuring, futures, swaps, options and forwards). We are

particularly interested in understanding the characteristics of this second group, financially

sophisticated SFFs.

Most of the existing literature on SFFs focuses on basic lending products. We study a

broader set of financial products. A more financially sophisticated firm that chooses to adopt

non-basic financial products is sending a signal to financial institutions that the firm is

seeking a long-term relationship with banks. In fact, relationship banking is defined as “the

provision of financial services by a financial intermediary that i) invests in obtaining

customer specific information… and ii) evaluates the profitability of these investments

through multiple interactions with the same customer over time and/or across products.”

(Boot, 2000, p.10, emphasis added). Two critical dimensions of relationship banking are the

existence of proprietary information and multiple interactions, “often through the provision of

multiple financial services” (Boot, 2000, p.10).

Relationship banking, as Boot (2000) shows, is comprised not only of the provision of

funds, but also other financial services such as cash management. These services expand the

amount of information available to the intermediary. The information that banks obtain in

selling multiple services – particularly non-basic ones – to the same customer may be of

value in lending to that customer (Degryse and Van Cayseele, 2000).

2
For small medium enterprises credit availability is a very important element for their

development (Binks and Ennew, 1997), and banks are the main provider of credit. Binks and

Ennew (1997) argue that, “participative firms [small firms that seek to establish a relationship

with the bank]… receive much better quality with respect to charges and interest rates”

(p.173; see also Berger and Udell, 1995). Banks in fact might provide loans that are not

profitable in the short run for the financial institution but that could build an advantageous

long-term relationship with the firm (Boot, 2000).

Hence, a firm’s interest in a broader choice of non-basic products is a signal to banks

that a firm may be looking for a special relationship with the financial institution, which

could lead to a higher level of care and attention, less credit constraints and, consequently, to

higher growth opportunities that are essential to small and medium enterprises (SMEs). For

this reason, it is important to study not only the lending products, but the entire range of non-

basic financial products bought by SMEs.

Our analysis focuses on family firms (FFs) among the universe of small businesses

(SBs). In the U.S. they generate 60% of the country’s business revenues (Heck and Stafford,

2001). SFFs play a key role around the world.


1
Furthermore, FFs are predominant among SBs in Italy (Corbetta and Montemerlo,

1999; Donckels and Fröhlich, 1991) and in the U.S. FFs constitute one-third of S&P 500

firms (Anderson and Reeb, 2003; Perez-Gonzalez, 2006).2

1
Morck, Stangeland and Yeung (2000) study family businesses around the world. They use the average

billionaire wealth (over national GDP) as a proxy for the incidence of family businesses in different countries.

The level of incidence of family businesses varies a lot across countries (1.1% for the United Kingdom, 2.4%

for OECD countries as a whole, 4.4% for the United States and Canada, 4.5% for Latin American economies,

13.3% for East Asian economies). Bennedsen, Nielsen and Wolfenzon (2004) define a FF as one in which the

family has at least 50% ownership, and find that 89% of companies in Denmark are family businesses.

3
SFFs have particular financial needs that stem from their small size and the nature of

family ownership.3 In addition, SFFs have fewer resources compared to larger firms to

survive changes in the state of the economy.4 In this context, our empirical study addresses

the following questions: 1) Do SFFs use only basic financial products (such as checking and

saving accounts), or do they also make broad use of non-basic products (such as mergers and

acquisitions advisory, factoring and leasing)? 2) What are the characteristics of financially

sophisticated SFFs in terms of generation, size, governance and financial advisory?

To address these questions, we formulate a questionnaire in collaboration with the

Chamber of Commerce of Milan, and sample 544 small firms that operate in Italy. We ask

the surveyed firms to report an extensive list of characteristics and financial policies. In

particular, our questionnaire gathers detailed information about demographics, ownership

structure, governance, financial management, key financial decision makers, financial

products purchased and reasons for satisfaction or dissatisfaction in relations with banks.

Among the financial products adopted by SFFs, we distinguish the basic from the

non-basic products as defined above. We divide non-basic products into four broad categories

depending on the needs served: 1) corporate finance products, 2) cash management products,

2
According to the Federal Reserve’s 1998 Survey of Small Business Finances, SBs contribute half of U.S.

private sector output (Bitler, Robb and Wolken, 2001). Interestingly, more than 90% of SBs in the U.S. are

managed by their owners.


3
Financial management is particularly critical for these firms. For a review of the SB financing literature, see

Berger and Udell (1998). Aronoff (1998) studies the complexity of the financial techniques adopted, while

Coleman and Carsky (1999), Cole and Wolken (1995) and Bitler, Robb and Wolken (2001) study the use of

financial products mainly focusing on lending products.


4
“Financial management of family business used to be straightforward. A business was bootstrapped or started

with a loan from Uncle Harry and typically had as its goal making plenty of cash (but not profit) and getting and

staying out of debt. Sophisticated financial management was for Wall Street, not Main Street” (Aronoff, 1998,

p.183).

4
3) corporate lending products, and 4) risk management products. For each category, we

develop a score of financial sophistication that measures the number of different kinds of

products a firm adopts. For example, a firm has the highest level of financial sophistication in

the corporate finance category if it adopts all four non-basic products in that category during

the three years period (2000-2002) covered by the survey.

We analyze the following SFF characteristics: 1) the generation of the family that

owns the SFF; 2) the presence of an external (i.e., non-family) chief executive officer (CEO)

and chief financial officer (CFO); 3) the existence of external shareholders; and 4) the size of

the firm. Our main finding is that SFFs are extremely sophisticated, especially with regards to

the corporate lending and corporate finance product categories. Generation, external

ownership, and non-family CFO affect SFFs choices of non-basic financial products,

although differently in the four product categories studied.

Firms that have an external shareholder and that hire a non-family CFO show an

higher variety of non-basic financial products adopted in three of the four product categories

(cash management, corporate lending and risk management), and hence are more willing to

have the “multiple interactions” with banks that lead to stronger relationships with financial

intermediaries. These results are relevant for SFF owners’ choices when they seek to

establish a long-term relationship with a bank (for example, whether to hire a non-family

member as CFO or to allow an external shareholder in the ownership structure) and for

financial institutions that target SFFs.

The paper proceeds as follows. Section 2 defines SFFs, while Section 3 describes the

criteria for financial sophistication and the non-basic financial products. Section 4 reviews

the relevant literature and introduces the hypotheses. Section 5 explains the data and

methodology. Section 6 presents the results and Section 7 discusses them. Section 8

concludes.

5
2. FFs and SBs

This section explains our criteria for defining SFFs, which are based on the definition

of 1) SBs and 2) FFs. For SBs, we adopt the European Union (EU) definition, which is based

on the following ceilings for inclusion in the SME category: 250 or fewer employees,

turnover of less than or equal to 50 million Euros and total assets of less than or equal to 43

million Euros (Commission of the European Communities, 2003).

We base our definition of FFs on past studies. La Porta et al. (1999), Claessens et al.

(2000) and Faccio and Lang (2002) use 10% and 20% ownership thresholds to study large

publicly held firms. However, the appropriate threshold to define a firm as a “FF” should be

based on the dispersion of corporate ownership within a country. For example, Bennedsen et

al. (2004) adopt a 50% ownership threshold in the case of Denmark.

To qualify as a FF in our definition of SFFs, we adopt a strict criterion by adding to

the EU definition of SB the following filters for a firm to qualify as a FF: 1) the family has a

majority stake (more than 50% ownership); 2) the family is involved in the business and

family members have effective decision power (either because the CEO is a family member

or the family controls the majority of the board); and 3) the CEO recognizes that the firm is a

family business.

3. Financial sophistication and non-basic financial products

Our database contains a range of financial products that are more or less widely

adopted. We identify two broad classes of products according to the number of firms that use

them. On the one hand, basic products are essentially commodities adopted by almost all

firms (95%). They are essential to the operations of the firm and they have no correlation

with any of the firm’s characteristics (such as size, generation, external CEO or shareholder).

6
These basic products include electronic fund transfers, remote banking, international bank

transfers, bill discounting, advances subject to collection and mortgages.

On the other hand, non-basic products are used only by a subset of firms. Non-basic

products are mergers and acquisitions (M&A), leveraged buy-out (LBO), management buy-

out (MBO), debt restructuring advice, cash management, short money, factoring, financial

leasing, syndicated loans, commercial paper advisory and structuring, futures, swaps, options

and forwards. Consistent with the findings of Elliehausen and Wolken (1990), the use of our

complex product categories increases with firm’s size.5

In our data set, there are two additional products (corporate credit cards and finance

bills) that we exclude from the analysis. We exclude corporate credit cards because the

distinction between corporate and personal credit cards is often arbitrary. We exclude finance

bills because they are adopted by only a very small number of firms (3 firms).

We classify non-basic products into four different categories based on the needs

served: 1) corporate finance, 2) cash management, 3) corporate lending, and 4) risk

management. For each of these categories, our score of financial sophistication counts the

different kinds of products adopted at least once by a firm. For example, if a SFF uses three

of the four non-basic products we have identified in the corporate finance category, this

firm’s score of financial sophistication in the corporate finance category is three. Table 1

summarizes our classification of non-basic financial products.

5
Elliehausen and Wolken (1990) analyze the following products: Checking, savings, leasing, line of credit,

mortgage, motor vehicle loan, equipment loan, and other types of loans. The percentage of SBs that adopt these

products is similar to the percentage that adopts the products analyzed in our study. Elliehausen and Wolken

(1990) classify leasing and lines of credit as complex products. As with our non-basic products, these complex

products are adopted by a subset of firms. The use of non-complex products is not linked to any particular

characteristic of the small firms.

7
* * * Insert Table 1 about here * * *

For the purposes of this study, we define a firm to be more financially sophisticated in

one of the four specific financial product categories when it uses a broader range of non-basic

financial products within this given category. The measures of financial sophistication

presented in the literature are based either on the financial techniques adopted (such as capital

budgeting, discounted cash flow analysis, and risk management), as in Filbeck and Lee

(2000) and Aronoff (1998), or on President/CEO self-assessment, as in Sonfield and Lussier

(2004).6 Therefore previous studies on financial sophistication mainly focus on internal

financial methods rather than external products provided by financial intermediaries.

Furthermore the existing literature on financial products focuses on lending products (see

Coleman and Carsky, 1999). Finally we are not aware of any study that analyzes the financial

products used by SFFs and the drivers of their choices.

The literature on FFs is recent, although growing (for a review of the family

businesses literature, see Bird et al., 2002; Rogoroff and Heck, 2003; Sharma, 2004; Winter

et al., 1998, among others). Recently, academics have turned their attention to the differences

in performance and value of FFs vs. non-FFs, and of FFs with differing characteristics.7 The

newness of the literature about FFs in general and FFs’ financial issues in particular, can

6
In the survey, the authors ask firms’ presidents or CEOs to give a score between 7 (“describes our firm”) and 1

(“does not describe our firm”) to the following statement: “This firm’s top management uses sophisticated

methods of financial management (such as capital budgeting, breakeven analysis, discounted cash flow, sales

forecasting, etc.)” (Sonfield and Lussier, 2004, p. 202).


7
See Adams, Almeida and Ferreira, 2009; Anderson and Reeb, 2003; Basu, Dimitrova and Paeglis, 2009;

Bennedsen and Nielsen, 2010; Burkart, Panunzi and Shleifer, 2003; McCann, Leon-Guerrero and Healey, 2001;

McConaughy and Phillips, 1999; Morck, Stangeland and Yeung, 2000; Perez-Gonzalez, 2006; Sraer and

Thesmar, 2007; Villalonga and Amit, 2006.

8
explain why there is a large gap in knowledge of the financial products adopted by these

firms.8 The SB financial literature focuses mainly on credit constraints and the financing of

SBs (for a review of the literature, see Berger and Udell, 1998).

Few studies have analyzed financial products; again, they focus mainly on credit

products (Biltler et al., 2000; Cole and Wolken, 1995; Elliehausen and Wolken, 1990).

We mainly refer to studies about financial techniques and to the few about financial

products in order to identify those SFF characteristics that might lead to the adoption of non-

basic products (and consequently to an understanding of the level of financial sophistication

of each SFF). Past studies find that some variables do affect the use of financial techniques,

specifically, size, generation, presence of an external CEO or CFO, and presence of an

external shareholder (a non-family member). In the next section, we present the main

characteristics that previous studies find to be drivers of the use of financial techniques.

Based on these characteristics, we then build our hypotheses.

4. Hypotheses

4.1. SFFs and generation

The first SFF characteristic analyzed in our study is the generation of the family that

owns the firm. Filbeck and Lee (2000) analyze the extent of implementation by FFs of capital

budgeting, risk adjustment and working capital techniques, which they use as proxies for the

sophistication of a firm’s financial management. They find that third and older generations

SFFs tend to implement more sophisticated techniques compared to firms in their first and

second generations. However, the evidence in Filbeck and Lee (2000) that third-generation

and older companies adopt more sophisticated financial analysis techniques is mixed; they

8
Among the few studies about FFs and financing issues Boubakri and Ghouma (2010) show that family control

has a positive effect on bond yield-spreads and a negative effect on bond ratings.

9
find differences between generations only for some of the techniques analyzed (namely the

risk management technique of Monte Carlo simulation and the working capital techniques of

sales forecasting and accounts receivable).

The literature also finds that FFs in their second, third, fourth and later generations are

less valuable (in terms of Tobin’s Q) than firms in their first generation (see Villalonga and

Amit, 2006). However, to our knowledge, no study examines the differences in the financial

products used and their drivers.

Hence we analyze the sophistication of firms’ financial policies by focusing on their

current family generation. We argue that third and older generations develop more

sophisticated financial policies than their predecessors in order to respond to the increasing

complexity and diversity of the firm’s financial needs. According to this theoretical and

empirical groundwork, we make the following hypothesis:

H1: Third and older generations SFFs are more financially sophisticated than first- and

second-generation SFFs.

4.2. SFFs and external CFO and CEO

The second aspect analyzed is the existence of a non-family CEO and/or CFO. There

are few studies in the literature on the effects of an external CEO or CFO on financial

techniques and innovation and results are mixed. Filbeck and Lee (2000) argue that FFs with

an external CFO 1) tend to use more sophisticated capital budgeting techniques and 2)

employ less modern risk-adjustment techniques.

There is no direct evidence with respect to the impact that external CEOs and CFOs

have on the incentives to adopt innovative financial products. However, the presence of a

10
professional CEO in a SFF seems to affect the broader inclination to innovate. Furthermore,

especially in the case of descendants, non-family CEOs and CFOs enhance firm performance

and value (see Anderson and Reeb, 2003; Bennedsen et al. 2007; Burkart et al., 2003; Caselli

and Di Giuli, 2010; Caselli and Gennaioli, 2003; Morck et al., 2000; Perez-Gonzalez, 2006;

Smith and Amoako-Adu, 1999; Villalonga and Amit, 2006). Based on these findings, we

expect that the introduction of a non-family CEO or CFO to the firm will govern the choice

of financial products used, leading to our second hypothesis:

H2: SFFs with an external (non-family) CEO or CFO are more financially sophisticated than

those without an external (non-family) CEO or CFO.

4.3. SFFs and external shareholders

The third characteristic of FF that we study is the presence of non-family shareholders

within the company’s ownership. Filbeck and Lee (2000) find that FFs characterized by

“outside influence” (i.e., external shareholders on the board of directors), are more likely to

employ sophisticated modern capital budget techniques compared to other family businesses,

though they are less likely to use modern risk-adjustment techniques.

External shareholders can play an important networking role, facilitating access to

resources and, in the context of our study, financial products that the firm might otherwise

not have been able to access. An outside shareholder can be the bridge between a SB and

financial markets and institutions (as shown in Voordeckers et al., 2007). By extension, we

argue that the presence of external shareholders should increase the level of financial

sophistication in terms of products used.

11
H3: SFFs with external shareholders are more financially sophisticated than SFFs without

external shareholders.

4.4. SFFs and size

Finally, we turn to the effect of firm size on the financial sophistication of SFFs. Gallo

and Vilaseca (1996) analyze Spanish FFs and find a significant relationship between the size

of the firm and the different types of financing products purchased. The authors observe that

the variety of products purchased is greater for large FFs. Bitler et al. (2000) and Cole and

Wolken (1995) observe that the likelihood of a SB using a financial service increases with its

size.

Using the 1993 National Survey of Small Business Finances, Coleman and Carsky

(1999) analyze the financial products used by SFFs. Their study focuses on credit lending.

The authors find that increasing SFF size has a positive impact on the adoption of these

financial products. Niskanen and Niskanen (2006) observe that the use of accounts receivable

is positively related to SB size in the Finnish market. Based on these findings, we argue that

size is a driver of financial policy sophistication.

H4: Larger SFFs are more financially sophisticated than smaller ones.

5. Data and methodology

5.1. Sample and questionnaire

12
We sent our questionnaire to 544 businesses.9 The sample closely resembles the

composition of the screened universe with respect to the number of firms in each industry and

the average number of employees in each firm. The questionnaire response rate was rather

high – 205 firms, or 38%. This is probably due to the fact that the questionnaire was

introduced along with the annual survey of the Chamber of Commerce.10 The questionnaire

has five sections:

1) general information about the firm: legal status, year of constitution, industry, number of

employees, assets, sales, leverage, and cash flow;

2) ownership structure and governance: number of family members involved in the business,

presence of external shareholders, generation of the family that currently owns the

business, presence of a family or non-family CEO, recognition by the CEO that the firm is

a FF, existence of a parent firm, number of branches, and presence of a fund in the

ownership structure;

3) general information about the financial management and the key financial decision

makers: number of banks (native and foreign) used by the firm, purchase of products from

investment banks and presence of an external CFO;

9
These are the firms annually surveyed by the Chamber of Commerce that satisfy our criteria for small

businesses family firms. That is, they are small businesses according to the EU definition, and they have a single

owner with absolute control (see Section 2).


10
The distribution of firms that answer the questionnaire accurately represents the sample and consequently, the

universe of firms. The only exception is in the “agriculture, hunting and forestry” industry, from which we

received no responses; however, these firms comprise only 1% of our SFF universe. We also study firms that did

not reply. They do not show particular characteristics in terms of industry, employees, age or legal status. In

addition, to control for selection bias in the response of the questionnaire, we use a Heckman selection model

(Heckman, 1979). For an application of selection models in corporate finance see Li and Prabhala (2007).

13
4) products purchased: electronic fund transfers, remote banking, cash management,

international bank transfers, corporate credit cards, bill discounting, advances subject to

collection, factoring, financial leasing, operating leasing, mortgages, syndicated loans,

commercial paper, finance bills, money at short notice (short money), futures, options,

swaps, forwards, securitization, M&A, LBO, MBO and debt restructuring advice. In our

questionnaire, we ask if the firm has used each kind of product (e.g., M&A advisory)

during the period 2000–2002. This variable takes the value of 1 if the product was used or

zero if it was not.11

Analyzing the questionnaire results against our definition of a FF, we find that all but

18 of the respondents in our sample are family businesses in the sense that they satisfy the

following two requirements: family involvement in the business, and recognition by the CEO

that the firm is family-run (see Section 2). Among the 18 exceptions, in some firms the family

is no longer involved in the business and in others, the CEO does not consider the firm to be

family run due to the fact that the business is transitioning to non-family status. Table 2

contains descriptive statistics of the main variables analyzed.

* * * Insert Table 2 about here * * *

5.2. The model

We examine the four product categories separately. Our first task is to explain how we

measure them. In our questionnaire, we ask if the firm has used each type of product (e.g.,

leasing) in the period 2000–2002. This yields a dummy with value 1 if the type of product

was used, 0 if it was not. We sum up the dummies for each category (for example, for the

corporate finance category we have four kinds of products/dummies to add, with a final value

11
An explanation of the main financial products analyzed in this study is provided in the Appendix, Table A.

14
that ranges from 0 to 4, while for the cash management category we have 2 kinds of

products/dummies and the category score ranging from 0 to 2) in order to obtain one score for

each product category (four scores in total).12

We subdivide the non-basic products into the categories of corporate finance (M&A,

LBO, MBO and debt restructuring advice), cash management (cash management and short

money), corporate lending (factoring, financial leasing, syndicated loans and commercial

paper advisory and structuring) and risk management (futures, swaps, options and forwards).

The above mentioned four scores constitute the dependent variables

( CATEGORY _ SOPHISTICATION ) in the regressions we run.13 According to our

hypotheses, the model (and consequently the regressions we perform), has the following

specification:

CATEGORY _ SOPHISTICATION i j = α 0 + α 1 SECONDGi + α 2THIRDOLDERGi + α 3CEOi +


+ α 4 CFOi + α 5 EXTERNALS i + α 6 EMPLOYEESi + α 7 CONTROL _ VARIABLES i + ε i ,

where CATEGORY _ SOPHISTICATION i j is the score of product category sophistication

(measured for each category separately), with i = 1,...,187 firms studied, and j = 1,…,4

product categories analyzed (1 = corporate finance, 2 = cash management, 3 = corporate

lending, 4 = risk management).

12
We show statistics for each product category in Section 6.1. Correlations among the products are available

upon request.
13
By adding the dummies of the products adopted, we implicitly assign the same weight to each product within

the same category. We do this deliberately, because our goal is to understand the firm’s overall financial policy,

rather than the drivers of each single product. The only differentiation we make is related to the product

category.

15
We show the independent variables in Table 3 with their expected signs. The expected

signs are based on the hypotheses of Section 4 (for the CEO, CFO, SECONDG,

THIRDOLDERG, EXTERNALS and EMPLOYEE). We also expect INVESTMENTB to be

positively related to the use of financial products. If a firm used an investment bank to buy a

product other than the ones we account for, the investment bank could establish a relationship

with the firm, acting as a kind of external CFO. We have no expectation for the variable

BANK (number of commercial banks from which the firm has bought at least one product).

One might reason that the higher the number of banks, the higher the chance of using

different financial products; on the other hand, the lower the number of banks, the greater the

chance that a single bank could establish a strong relationship with a firm and advise it to

purchase a broader variety of financial products (Boot and Thakor, 2000).

We also control for several accounting variables: the value of the average ratio of

sales over assets (SALES/ASSET) and the value of this ratio in 2000 (SALES/ASSET 00),

the average leverage in the three years (LEVERAGE), and the leverage in the year 2000

(LEVERAGE 00), the standard deviation of the sales in the three years (SALES VOL), and

the compound annual growth rate of the sales (SALES CAGR).

Less profitable firms (profitability is measured with SALES/ASSET and

SALES/ASSET 00) might need to buy corporate lending products, but at the same time they

might be less inclined to make acquisitions (therefore have a lower need for corporate finance

products). Firm with a high level of leverage (LEVERAGE, LEVERAGE 00) or with volatile

sales (SALES VOL) might need to buy more risk management products and to better control

their cash flows (and therefore acquire cash management products). Finally firms that are

growing in term of sales (SALES CAGR) might be willing to buy corporate finance products

(they might want to acquire other firms), but at the same time might need more sophisticated

cash management tools (hence the need for cash management products).

16
* * * Insert Table 3 about here * * *

We do not use a logistic regression since our dependent variables are not binary, but

scores. We follow the analysis of Filberk and Lee (2000) concerning the impact that firm

characteristics have on the adoption of various financial techniques, and the analysis of

McConaughy and Phillips (1999) on the impact that family generation has on firm

performance and financing. In the above studies the authors use OLS regression. We use

standard OLS regressions as well, however, we also use Heckman selection model (see

Heckman, 1979). Results show that we do not incur in any selection bias.

Regarding the Heckman selection model, in the selection equation we use as

independent variables most of the variables introduced in our outcome equation

(EMPLOYEE, PARENT, INDUSTRY DUMMIES, SALES/ASSET, SALES/ASSET 00,

LEVERAGE, LEVERAGE 00, SALES VOL, SALES CAGR) plus the average value of the

assets in three years (ASSET). These are the variables available for both the firms that answer

the questionnaire and for the ones that don’t answer. For the firms that don’t answer we

obtain the data from the Chamber of Commerce (and we double check the answers of the

firms that answer). The results of the selection equation are reported in the Appendix, Table

B.

In the selection equation we cannot use variables related to the generation of the

family, the family status of the CEO and CFO, the existence of external shareholders, the

number of banks and the existence of a relationship with an investment bank because we can

obtain these data only through the questionnaire. However, we do not think that the above

variables should influence the probability that a firm answers the questionnaire. We believe

that the only variables that might affect the probability of answering the questionnaire are

17
related to size that we measure both with the number of employees and with the amount of

assets. Bigger firms might have an office dedicated to public relations/ more resources to

answer the questionnaire.

In our regressions we control for serial correlation and heteroskedasticity using the

Huber White Sandwich Estimator for variance. Finally we do not use panel data analysis,

given that our dependent variables do not change over time. Among our robustness checks

we run Tobit regressions (we control for selection bias also in the Tobit regressions). Results

are robust.

6. Results

6.1. Financial sophistication scores: Dependent variables

*** Insert Table 4 about here***

In Table 4 we show the descriptive statistics of our dependent variables

( CATEGORY _ SOPHISTICATION j ). The mean scores of the corporate finance, cash

management, corporate lending, and risk management product categories are 1.716, 0.433,

2.283, and 0.919 respectively. However, it is difficult to compare them. Hence, we divide

each mean score by the total number of products in the respective category (for example, for

the corporate finance category, we divide the mean by 4). Results show that SFFs are more

financially sophisticated in their choice of corporate finance and corporate lending products

than in their adoption of cash management and risk management products.

SFFs use, on average, almost half of the non-basic products in the corporate finance

category. At the same time, SFFs buy, on average, more than half of the non-basic financial

products in the corporate lending category. These two categories show a low standard

18
deviation. On the other hand, SFFs use, on average, less than a quarter of the non-basic

products of cash management and risk management. However, both these categories present a

very high standard deviation. Hence, there is a large difference among SFFs with respect to

their use of non-basic products in these categories: SFFs use either all of the non-basic

products in the cash management and risk management categories, or none of them.

On average, SFFs are more financially sophisticated relative to the corporate finance

and corporate lending product categories than for the cash management and risk management

product categories; however, in the cash management and risk management product

categories the use of non-basic products by SFFs varies substantially across firms.

6.2. Correlations matrix

* * * Insert Table 5 about here * * *

Before discussing our regression results, we analyze the correlation structure between

the independent variables. As we show in Table 5, some of the variables are significantly

correlated. The main correlations are:

1. CEO and CFO are both positively correlated with the EXTERNALS (correlations of

0.587 and 0.381). An external shareholder would probably be more willing than a family

owner to hire a non-family professional.

2. EXTERNALS is positively correlated with EMPLOYEE (correlation 0.260) and

THIRDOLDERG (correlation 0.196). As firms grow in size and generation they might

need external capital.

3. EMPLOYEE is positively correlated with THIRDOLDERG (correlation 0.431), possibly

because the firm grows in size with each generation. EMPLOYEE is also positively

19
correlated with CEO (correlation 0.219) and CFO (correlation 0.244). Bigger firms might

need a more professional managerial/financial advice.

4. SECONDG and THIRDOLDERG are negatively correlated (correlation –0.464). By

definition, if a firm is in its second generation, it cannot be in its third or older

generation.14

5. INVESTMENTB is positively correlated with EMPLOYEE (correlation 0.439) and

THIRDOLDERG (correlation 0.326). When the firm becomes larger (EMPLOYEE) and

older (THIRDOLDERG), it has stronger needs for particular advice, expertise, and

products (INVESTMENTB).

6. BANK is positively correlated with EMPLOYEE (correlation 0.682). It is very common

in Italy for firms to have more than one bank instead of establishing a strong relationship

with a single bank, especially as the firm grows in size (Pozzolo, 2004).

7. THIRDOLDERG is positively correlated with BANK (correlation 0.338), probably due to

the fact that firms in their third generation or older tend to be larger than first- and

second-generation firms. Similarly, THIRDOLDERG is positively correlated with CEO

(correlation 0.197). Older and bigger firms might need a more professional managerial

advice.

8. CEO is positively correlated with CFO (correlation 0.553). External managers might

better understand the importance of having an external finance specialist.

9. INVESTMENTB and CFO are positively correlated (correlation 0.325). An external CFO

might better know the value of the advice obtained from an investment bank.

14
Note that the negative correlation is not equal to -1 because we use the first generation as the benchmark for

the dummies SECONDG and THIRDOLDERG.

20
We run diagnostic statistics to understand whether our regressions could be affected

by multicollinearity. Eigenvalues statistics, the analysis of tolerance and the variance

inflation factors show that there is not a multicollinearity problem.15 We now turn to the

results of the regressions.

6.3. Regressions

* * * Insert Tables 6-9 about here * * *

Table 6-9 reports the results of the regressions. Columns 1-8 of our tables show

standard OLS regressions. In column 9 we use the Heckman selection model to show that we

do not incur in any selection bias.16 As an additional robustness check we run Tobit

regressions (column 10).

Being at the third generation or older (THIRDOLDERG) is associated with a positive

impact for a SFF in its use of corporate finance (Table 6) and cash management products

(Table 7). SECONDG is positively and significantly correlated only with the use of corporate

lending products (Table 8); however the variable is only significant at the 10% level and

loses its significance when we control for profitability and leverage.

The presence of an external CFO (CFO) has a significant and positive impact on the

use of cash management products (Table 7), while the existence of an external shareholder

15
Statistics available upon request.
16
The selection equation is run on 526 firms. We sent the questionnaire to 544 firms. 205 answer the

questionnaire but only 187 are FFs according to our definition. In our selection equation we take away from the

544 firms the 18 companies that answer the questionnaire but are not FFs according to our definitions and are

not taken into account in our outcome equation. These 18 firms cannot be considered as firms that do not answer

the questionnaire and at the same time are also not considered in our outcome equation.

21
(EXTERNALS) has a positive and significant effect on the adoption of corporate lending

(Table 8) and on risk management products (Table 9). Size (EMPLOYEE) is positively and

significantly related with the use of corporate finance products (Table 6) and with cash

management products (Table 7). However in the case of the cash management products firm

size is only marginally significant. Contrary to our expectations, the presence of an external

manager (CEO) has no impact on any of the product categories analyzed.

Controlling for profitability (SALES/ASSET), leverage (LEVERAGE), sales

volatility (SALES VOL) does not change the effect of our main independent variables on the

product sophistication scores. The results do not change if we measure sales and leverage in

the first year, i.e 2000 (SALES/ASSET 00 and LEVERAGE 00).17 Controlling for sales

growth (sales CAGR) does not change the main results as well.

Among the control variables listed above the only significant variables are

SALES/ASSET and SALES/ASSET 00, both negatively and significantly correlated with the

use of cash management and corporate lending products. More profitable firms need to

borrow less and might not need a careful management of their cash.

7. Discussion

7.1. H1, the generational impact

Consistent with our first hypothesis, the generation of the owner is a critical

determinant of the level of financial sophistication of the firm, although only for the

corporate finance and cash management categories. THIRDOLDERG is positive and

significant for both these categories.

17
Instead of SALES/ASSET, SALES/ASSET 00 and SALES VOL we have also used the Cash Flow (statistics

not reported). Results do not change.

22
As for the corporate finance products, firms at their third or later generation are more

willing and have more capital to acquire new companies, as opposed to grow internally. Such

companies are also more likely to have an established reputation, and have grown enough to

either raise a sufficient amount of debt for an LBO or to be targeted for a leveraged

acquisition or an MBO. Firms in their third or later generation are more likely to have an

external manager or CFO and to incur an MBO. Finally, these firms are more interested in

restructuring debt compared to firms still in their first two generations.

As in the case of corporate finance products, younger firms do not have or feel the

need for cash management products. We argue that corporate finance and cash management

products are more important later in a firm’s life. The need for external growth, debt

restructuring, or cash management is uncommon in the first phases of a firm’s development.

Once the firm has accumulated enough cash, built its reputation, has stable cash flow and

wants to grow or better manage its cash or debt, it is more willing to search for corporate

finance and cash management products.

As one might expect, the corporate lending products analyzed are not linked to the

family generation that runs the firm (which is somewhat related to the firm’s age). In contrast

with corporate finance and cash management services, corporate lending products are

important in every stage of a company’s development. While a startup is unlikely to need

debt restructuring, financial leasing or factoring may become necessary at any time. As with

corporate lending, risk management products are important at each stage of a firm’s life and,

consequently, in each generation.

It is difficult to compare our results to the previous literature, since most previous

studies on the financial management of small and/or FFs focus on financial techniques rather

than products. However, consistent with Filbeck and Lee (2000) – who primarily examine

capital budgeting, risk adjustment and working capital management techniques – we find no

23
effect of the first or second generation on SFFs use of financial products, while third

generation or older firms tend to be more financially sophisticated in terms of corporate

finance and cash management products. Summing up, H1 is not rejected for the corporate

finance and cash management product categories and is rejected for corporate lending and

risk management product categories.

7.2. H2, the effect of external CEO and CFO

The presence of an external CFO has a significant and positive impact only on cash

management products. The CFO is mainly dedicated to cash management activities.

Interestingly, the presence of an external (non-family) CEO does not have any

influence on any of the product categories analyzed. The results are somewhat difficult to

disentangle. With regards to corporate lending and risk management products, it appears that

the presence of an external shareholder has a stronger impact than the existence of an external

CEO. The mentioned networking role of external shareholders is more important for

accessing resources – in our case corporate lending and risk management products – than the

presence of an external CEO. As for cash management products, the presence of an external

CFO drives the choice of those products more than the existence of a non-family CEO (see

Caselli and Di Giuli, 2010, for more on the importance of an external vs. a family CFO).

The presence of an external CEO does not drive the choice of corporate finance

products, whose use should be linked more to the strategic planning of the firm (and therefore

to the CEO). Instead, the use of corporate finance products seems to be driven mainly by the

generation controlling the firm.

Our results are consistent with Filbeck and Lee (2000), who find that the presence of

an external CFO positively affects the use of some financial techniques, and with Caselli and

Di Giuli (2010), who demonstrate the positive effect that a professional CFO has on firm

24
performance as opposed to a family CFO. In summary, H2 is not rejected for the cash

management product category and is rejected for corporate finance, corporate lending and

risk management products.

7.3. H3, The external shareholder influence

The presence of an external shareholder is significant for corporate lending and risk

management products. According to these findings, external shareholders have a greater

effect on corporate lending and risk management than on corporate finance and cash

management activities. It appears that an external shareholder may help the firm gain access

to corporate lending and risk management products.

Our results are consistent with Filbeck and Lee (2000). They find that “external

influence” positively drives some of the most sophisticated financial techniques (specifically

capital budgeting). According to the authors, outside influence tends to make the financial

management process more objective. A further step would be to analyze in more detail the

impact of different types of external shareholders. In summary, H3 is not rejected for the

corporate lending and risk management products and is rejected for cash management and

corporate finance products.

7.4. H4, the size effect

Size is significant for corporate finance products and, marginally, for cash

management products. In both cases however, the value of the coefficient is close to zero;

therefore the impact of the variable is weak.18 Hence, among SFFs, differences in size are not

large enough to justify completely different uses of financial management products.

18
We also measure size by asset amount and obtain the same results (available upon request).

25
Niskanen and Niskanen (2006) find that in SBs size is positively related to the use of

accounts receivable, negatively related to the use of credit discount and has no effect on the

use of accounts payable. Similarly and consistent with our results, Filbeck and Lee (2000)

analyze the impact that size has on the use of various sophisticated financial management

techniques and obtain mixed findings; the variable is significant only for some financial

techniques.

On the other hand, Biltler et al. (2000) and Cole and Wolken (1995) analyzing credit

financial products, find that almost all of them increase in use with firm size (although their

findings are based on mean differences, hence there is no control for other variables).

Similarly, Gallo and Vilaseca (1996) find a positive relationship between FF size and variety

of financial products analyzed. However, their study focuses on big FFs, not small ones.

Finally, Coleman and Carsky (1999) find that size is an explanatory variable for some credit

products, although a direct comparison with our results is not possible since they analyze

products that differ from ours (with the exception of financial leases). In summary, H4 is not

rejected for the corporate finance and cash management products and is rejected for corporate

lending and risk management products.

7.5. The control variables

INVESTMENTB is a key determinant of the risk management products. If an

investment bank has sold a product to a firm, it might have a better knowledge of that firm’s

management and thus a greater chance of establishing a relationship with it, leading to the

sale of products that have not only risk management functions, but that are also speculative.

The number of commercial banks from which the firm has previously bought one

product affects the future purchase of products only for cash management products. The

higher the number of banks, the broader the variety of cash management products acquired:

26
the purchase of a cash management product is the easiest way to start a relationship with a

bank. Finally, the presence of a parent firm does not affect the choice of financial products

under consideration. Table 10 summarizes the results of the paper for all product categories

analyzed.

** * Insert Table 10 about here * * *

8. Conclusions

Our study focuses on the financial sophistication of SFFs, measured with the variety

of non-basic financial products adopted. These non-basic products have been subdivided into

the categories of corporate finance (M&A, LBO, MBO and debt restructuring advice), cash

management (cash management and short money), corporate lending (factoring, financial

leasing, syndicated loans and commercial paper advisory and structuring) and risk

management (futures, swaps, options and forwards).

We find that SFFs are financially sophisticated (in the sense that they make

considerable use of various kinds of non-basic financial products) particularly with respect to

the corporate lending and corporate finance product categories. The drivers of each product

category are different. SFFs in their third or older generation are more financially

sophisticated relative to the corporate finance and cash management products category than

SFFs in their first and second generations, while SFFs with an external CFO are more

financially sophisticated than SFFs without an external CFO in terms of the cash

management products they use. Finally, SFFs with an external shareholder are more

financially sophisticated with respect to the corporate lending and risk management products

they adopt. The presence of an external CEO does not affect financial sophistication in any

category, while size has a weak effect on a firm’s use of corporate finance and cash

27
management products. SFFs that have purchased at least one product from an investment

bank are more financially sophisticated relative to risk management products than firms that

have not.

These results have practical implications for the choices of SFF owner regarding the

existence of a non-family CFO, CEO and non family shareholders. A firm that is searching

for a strong and long-term relationship with banks through multiple interactions (i.e. the

purchase of multiple products from a bank) and is seeking, for example, a higher level of

sophistication in terms of cash management products, should consider hiring an external

CFO. In contrast, hiring a non-family manager would have no impact.

Consideration of the pros and cons of allowing an external shareholder into the

ownership of a company should take into account the higher level of financial sophistication

that the presence of an external shareholder can provide for corporate lending and risk

management products. Firms in their first and second generations should be aware of their

tendency to have a low level of financial sophistication, which could undermine their

relationship with banks and eventually their growth. Our findings might also be useful for the

financial institutions that supply financial products to SFFs. They could eventually tailor their

products based on SFF characteristics (generation, presence of external shareholder and

CFO).

Further research might take another perspective and study SFF perception of the

supply of financial products from banks. Do SFFs think that banks understand their financial

product needs? Do SFFs have difficulty in obtaining the products needed? Are SFF

characteristics understood by banks? Addressing the limitations of this study could lay the

groundwork for future research. Finally, all data pertains to firms in Italy. Future research

could test the broader applicability of the results by studying data on SFFs in other countries.

A cross-country study with subsamples from different timeframes could provide some insight

28
into the financial product policies of SFFs around the world and the impact of changes in

economic conditions, cultures and government policies, among other factors.

29
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34
Table 1 Use of non-basic products

This table shows the percentage of small FFs analyzed that use the financial products studied. For a description

of the products see Table A, Appendix

Product Categories Products Percentage of SFFs that Use Them

Corporate Finance M&A advisory 60.43

LBO 45.45

MBO 34.76

Debt restructuring advisory 31.02

Cash Management Cash management 29.41

Short money 13.90

Corporate Lending Factoring 56.68

Financial leasing 77.01

Syndicated loans 33.16

Commercial paper structuring and advisory 61.50

Risk Management Future 16.58

Option 28.88

Swap 17.65

Forward 28.88

35
Table 2 Descriptive statistics

This table shows descriptive statistics of the main independent variables (described in table 3)

Obs Mean Median Std. Dev


SECONDG 187 0.45 0.00 0.50
THIRDOLDERG 187 0.21 0.00 0.41
CEO 187 0.22 0.00 0.42
CFO 187 0.17 0.00 0.37
EXTERNALS 187 0.17 0.00 0.37
INVESTMENTB 187 0.16 0.00 0.36
BANK 187 3.66 3.00 2.08
PARENT 187 0.30 0.00 0.46
EMPLOYEE 187 39.34 37.50 33.81
SALES/ASSET 187 1.16 1.08 0.23
SALES VOL 187 1.01 0.31 1.72
LEVERAGE 187 1.52 1.20 0.68
SALES CAGR 187 0.10 0.08 0.10

36
Table 3 Definitions of the independent variables

VARIABLES DEFINITION EXPECTED SIGN

SECONDG Dummy with value 1 if the firm is in the second generation, zero otherwise. ?

THIRDOLDERG Dummy with value 1 if the firm is in the third generation, zero otherwise. +

CEO Dummy with value 1 if the manager is a non-family member, zero otherwise. +

CFO Dummy with value 1 if the CFO is a non-family member, zero otherwise. +

EXTERNALS Dummy with value 1 if there is a non-family shareholder, zero otherwise. +

EMPLOYEE Number of employees of the firms used as a proxy for size. +

CONTROL VARIABLES

INVESTMENTB Dummy variable with value 1 if there is an investment bank from which the +

firm has bought at least one financial product that is different from the ones

included in our dependent variables, zero otherwise.

BANK Number of commercial banks from which the firm has bought at least one ?

product.

PARENT Dummy with value 1 if the small FF has a parent firm, zero otherwise. ?

SALES/ASSET Average of the ratio of the sales over the assets in the three years analyzed -with CLa products

+ with CFb products

SALES/ASSET 00 Ratio of the sales over the assets in the year 2000 - with CLa products

+ with CFb products

LEVERAGE Average of the ratio of debt over equity in the three years analyzed + with RMc &

CMd products

LEVERAGE 00 Ratio of debt over equity in the year 2000 + with RMc &

CMd products

SALES VOL Ratio of the standard deviation of sales over the mean of sales in the tree years + with RMc &

analyzed CMd products

CAGR SALES CAGR (compound annual growth rate) of the sales measured in the three + with CFb &

years analyzed CMd products

INDUSTRY Dummy variables for the industries ?

a corporate lending
b
corporate finance
c
risk management
d
cash management

37
Table 4 Financial sophistication scores: Descriptive statistics

This table shows descriptive statistics of the dependent variables (category_sophistication scores). We subdivide

the financial products into four categories: corporate finance products (M&A, LBO, MBO and debt

restructuring advice); cash management (cash management and short money); corporate lending (factoring,

financial leasing, syndicated loans and commercial paper advisory and structuring); and risk management

(futures, swaps, options and forwards).

Statistics CATEGORY_SOPHISTICATION

Corporate Finance Cash Management Corporate Lending Risk Management

Products Products Products Products

Mean 1.716 0.433 2.283 0.919

Median 2.000 0.000 2.000 1.000

Standard Deviation 0.989 0.613 0.972 1.010

Variance 0.978 0.376 0.946 1.020

Minimum 0.000 0.000 0.000 0.000

Maximum 4.000 2.000 4.000 4.000

Mean/Total Number Products in

each category (Maximum) 0.429 0.216 0.570 0.229

Standard deviation/Mean 0.576 1.415 0.425 1.098

38
Table 5 Correlations among main independent variables
*, **, and *** indicate significance at the 0.1, 0.05, and 0.01 levels (2-tailed), respectively. P values in parentheses
EXTERNALS CEO EMPLOYEE SECONDG THIRDOLDERG PARENT BANK INVESTMENTB CFO SALES/ASSET LEVERAGE SALES VOL SAL. CAGR

EXTERNALS 1 0.587*** 0.260*** 0.031 0.196*** -0.077 -0.030 0.047 0.381*** 0.049 -0.076 0.219* 0.087

(0.000) (0.000) (0.673) (0.007) (0.298) (0.680) (0.520) (0.000) (0.504) (0.296) (0.084) (0.236)

CEO 1 0.219** * 0.081 0.197*** -0.134* 0.070 0.159** 0.553*** 0.067 -0.127* 0.248* 0.079

(0.003) (0.272) (0.007) (0.068) (0.340) (0.030) (0.000) (0.355) (0.082) (0.079) (0.278)

EMPLOYEE 1 -0.153** 0.431*** -0.159** 0.682*** 0.439*** 0.244*** 0.142* 0.104 0.685* 0.281***

(0.036) (0.000) (0.030) (0.000) (0.000) (0.001) (0.052) (0.155) (0.075) (0.000)

SECONDG 1 -0.464*** -0.037 -0.203*** -0.120 0.060 0.062 0.046 -0.123* -0.021

(0.000) (0.611) (0.005) (0.103) (0.415) (0.394) (0.528) (0.091) (0.771)

THIRDOLDERG 1 -0.111 0.338*** 0.326*** 0.161** 0.069 -0.054 0.356* 0.048

(0.130) (0.000) (0.000) (0.028) (0.344) (0.458) (0.086) (0.513)

PARENT 1 -0.137* -0.091 -0.139* -0.126* -0.081 -0.008 -0.0432

(0.062) (0.215) (0.058) (0.083) (0.266) (0.917) (0.556)

BANK 1 0.291*** 0.032 0.078 0.143* 0.543* 0.231*

(0.000) (0.665) (0.283) (0.051) (0.076) (0.085)

INVESTMENTB 1 0.325*** -0.108 -0.014 0.406* 0.208*

(0.000) (0.138) (0.841) (0.072) (0.065)

CFO 1 0.108 -0.053 0.308* 0.172*

(0.140) (0.463) (0.069) (0.078)

SALES/ASSET 1 0.744*** 0.041 0.010

(0.000) (0.572) (0.892)

LEVERAGE 1 0.076 0.281***

(0.298) (0.000)

SALES VOL 1 0.680***

(0.000)

SAL. CAGR 1

39
Table 6 Firm characteristics and corporate finance products

This table shows the effect of firm characteristics on the corporate finance’s sophistication score. Columns 1-8

show results of standard OLS regressions. In column 9 we use Heckman selection model (Heckman, 1979) to

control for selection biases. Column 10 shows results of a Tobit regression. *, **, and *** indicate significance

at the 0.1, 0.05 and 0.01 levels, respectively. P-values are in parentheses.

OLS OLS OLS OLS OLS OLS OLS OLS Heckman Tobit
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
SECONDG 0.031 0.038 0.036 0.039 0.036 0.025 0.034 0.013 0.012 0.012
(0.844) (0.804) (0.816) (0.800) (0.819) (0.873) (0.830) (0.938) (0.938) (0.946)
THIRDOLDERG 0.487** 0.500** 0.494** 0.515** 0.502** 0.499** 0.512** 0.440* 0.441* 0.484*
(0.025) (0.022) (0.024) (0.020) (0.022) (0.022) (0.019) (0.055) (0.053) (0.055)
CEO -0.113 -0.115 -0.116 -0.099 -0.106 -0.110 -0.104 -0.132 -0.131 -0.147
(0.620) (0.613) (0.609) (0.667) (0.644) (0.634) (0.649) (0.563) (0.544) (0.562)
CFO 0.288 0.303 0.303 0.316 0.311 0.264 0.262 0.265 0.264 0.326
(0.162) (0.151) (0.149) (0.131) (0.136) (0.204) (0.204) (0.219) (0.194) (0.212)
EXTERNALS -0.023 -0.030 -0.026 -0.043 -0.031 -0.039 -0.040 -0.029 -0.029 -0.119
(0.926) (0.904) (0.919) (0.866) (0.901) (0.877) (0.873) (0.909) (0.903) (0.669)
EMPLOYEE 0.006** 0.006** 0.006** 0.007** 0.007** 0.006* 0.005* 0.004* 0.004* 0.005*
(0.044) (0.041) (0.041) (0.038) (0.040) (0.059) (0.066) (0.082) (0.095) (0.085)
INVESTMENTB 0.137 0.110 0.111 0.083 0.095 0.105 0.106 0.083 0.085 0.085
(0.542) (0.640) (0.636) (0.727) (0.687) (0.646) (0.640) (0.730) (0.711) (0.749)
BANK 0.024 0.022 0.023 0.019 0.021 0.019 0.019 0.019 0.019 0.012
(0.585) (0.610) (0.606) (0.663) (0.645) (0.658) (0.656) (0.681) (0.663) (0.823)
PARENT 0.058 0.049 0.048 0.049 0.047 0.054 0.055 0.024 0.023 0.019
(0.690) (0.739) (0.744) (0.741) (0.749) (0.708) (0.702) (0.876) (0.877) (0.912)
SALES/ASSET -0.179 -0.335 0.438 0.561 0.156
(0.566) (0.477) (0.799) (0.738) (0.928)
SALES/ASSET 00 -0.171 -0.259 -0.526 -0.560 -0.215
(0.529) (0.513) (0.714) (0.690) (0.885)
LEVERAGE 0.068 1.330 1.310 1.284
(0.643) (0.186) (0.168) (0.312)
LEVERAGE 00 0.043 -1.283 -1.269 -1.264
(0.758) (0.185) (0.163) (0.312)
SALES VOL 1.030 0.076 0.083 0.105
(0.236) (0.283) (0.222) (0.256)
SALES CAGR 0.834 0.189 0.129 0.162
(0.164) (0.841) (0.887) (0.884)
CONSTANT 1.140*** 1.352*** 1.347*** 1.428*** 1.385*** 1.065*** 1.088*** 1.276** 0.939 1.208**
(0.000) (0.003) (0.001) (0.005) (0.002) (0.000) (0.000) (0.018) (0.147) (0.028)
IND. DUMMIES Y Y Y Y Y Y Y Y Y Y
OBSERVATIONS 187 187 187 187 187 187 187 187 187 187
R-SQUARE 0.22 0.22 0.22 0.22 0.22 0.23 0.23 0.24 0.09
ADJ. R- SQUARE 0.17 0.16 0.16 0.16 0.16 0.17 0.17 0.16

40
Table 7 Firm characteristics and cash management products

This table shows the effect of firm characteristics on the cash management’s sophistication score. Columns 1-8

show results of standard OLS regressions. In column 9 we use Heckman selection model (Heckman, 1979) to

control for selection biases. Column 10 shows results of a Tobit regression. *, **, and *** indicate significance

at the 0.1, 0.05 and 0.01 levels, respectively. P-values are in parentheses.

OLS OLS OLS OLS OLS OLS OLS OLS Heckman Tobit
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
SECONDG -0.096 -0.085 -0.089 -0.085 -0.089 -0.094 -0.098 -0.094 -0.094 -0.265
(0.296) (0.351) (0.330) (0.350) (0.334) (0.305) (0.288) (0.323) (0.298) (0.376)
THIRDOLDERG 0.277** 0.296** 0.287** 0.295** 0.283** 0.273** 0.261* 0.250* 0.249* 0.657*
(0.041) (0.027) (0.032) (0.029) (0.035) (0.047) (0.058) (0.074) (0.059) (0.089)
CEO -0.084 -0.088 -0.089 -0.089 -0.094 -0.086 -0.090 -0.108 -0.108 -0.308
(0.439) (0.407) (0.406) (0.402) (0.372) (0.438) (0.423) (0.353) (0.323) (0.458)
CFO 0.361*** 0.383*** 0.382*** 0.382*** 0.378*** 0.369*** 0.377*** 0.389*** 0.389*** 0.995**
(0.009) (0.005) (0.005) (0.005) (0.006) (0.007) (0.006) (0.003) (0.001) (0.020)
EXTERNALS -0.047 -0.057 -0.050 -0.056 -0.047 -0.041 -0.036 -0.044 -0.044 -0.145
(0.704) (0.645) (0.687) (0.657) (0.707) (0.741) (0.772) (0.732) (0.718) (0.750)
EMPLOYEE 0.003* 0.004* 0.004* 0.004* 0.004* 0.003* 0.004* 0.003 0.003 0.008
(0.083) (0.051) (0.055) (0.052) (0.058) (0.078) (0.066) (0.115) (0.112) (0.190)
INVESTMENTB 0.062 0.022 0.027 0.024 0.036 0.073 0.081 0.044 0.044 0.082
(0.694) (0.886) (0.861) (0.870) (0.812) (0.640) (0.596) (0.763) (0.751) (0.835)
BANK 0.045 0.042* 0.042* 0.043* 0.044* 0.046** 0.047** 0.044* 0.044* 0.120
(0.149) (0.074) (0.070) (0.082) (0.073) (0.047) (0.041) (0.071) (0.056) (0.192)
PARENT -0.073 -0.086 -0.086 -0.086 -0.086 -0.071 -0.071 -0.096 -0.096 -0.380
(0.358) (0.283) (0.284) (0.284) (0.290) (0.370) (0.375) (0.269) (0.246) (0.198)
SALES/ASSET -0.263 -0.251 0.044 0.056 0.549
(0.120) (0.466) (0.953) (0.937) (0.833)
SALES/ASSET 00 -0.226 -0.179 -0.270 -0.309 -1.412
(0.127) (0.546) (0.759) (0.711) (0.642)
LEVERAGE -0.005 0.419 0.427 1.744
(0.966) (0.564) (0.536) (0.427)
LEVERAGE 00 -0.023 -0.421 -0.427 -1.741
(0.844) (0.546) (0.518) (0.419)
SALES VOL -0.355 0.036 0.034 0.096
(0.520) (0.539) (0.543) (0.485)
SALES CAGR -0.523 -0.851 -0.832 -2.231
(0.197) (0.249) (0.231) (0.214)
CONSTANT 0.085 0.397 0.359 0.391 0.339 0.111 0.118 0.451 0.554* -0.015
(0.429) (0.107) (0.115) (0.203) (0.207) (0.351) (0.293) (0.139) (0.065) (0.987)
IND. DUMMIES Y Y Y Y Y Y Y Y Y Y
OBSERVATIONS 187 187 187 187 187 187 187 187 187 187
R-SQUARE 0.29 0.30 0.30 0.30 0.30 0.29 0.30 0.31 0.15
ADJ. R-SQUARE 0.24 0.25 0.25 0.24 0.24 0.24 0.25 0.24

41
Table 8 Firm characteristics and corporate lending products

This table shows the effect of firm characteristics on the corporate lending’s sophistication score. Columns 1-8

show results of standard OLS regressions. In column 9 we use Heckman selection model (Heckman, 1979) to

control for selection biases. Column 10 shows results of a Tobit regression. *, **, and *** indicate significance

at the 0.1, 0.05 and 0.01 levels, respectively. P-values are in parentheses.

OLS OLS OLS OLS OLS OLS OLS OLS Heckman Tobit
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
SECONDG 0.221 0.244 0.238 0.246 0.236 0.218 0.224 0.237 0.262 0.262
(0.155) (0.117) (0.124) (0.113) (0.127) (0.164) (0.149) (0.127) (0.114) (0.126)
THIRDOLDERG 0.202 0.240 0.225 0.278 0.255 0.208 0.222 0.302 0.251 0.330
(0.279) (0.207) (0.233) (0.148) (0.176) (0.263) (0.231) (0.144) (0.170) (0.181)
CEO 0.034 0.027 0.024 0.064 0.061 0.036 0.041 0.084 0.026 0.120
(0.878) (0.896) (0.908) (0.763) (0.774) (0.874) (0.856) (0.716) (0.916) (0.630)
CFO -0.079 -0.034 -0.031 -0.003 -0.002 -0.090 -0.099 0.024 0.046 0.004
(0.717) (0.873) (0.886) (0.990) (0.993) (0.683) (0.654) (0.915) (0.842) (0.987)
EXTERNALS 0.512** 0.491** 0.505** 0.461* 0.484** 0.504** 0.499** 0.478** 0.495** 0.589**
(0.033) (0.037) (0.031) (0.052) (0.040) (0.037) (0.041) (0.050) (0.030) (0.032)
EMPLOYEE 0.004 0.005 0.005 0.005* 0.005* 0.004 0.004 0.007* 0.006 0.007
(0.170) (0.102) (0.104) (0.084) (0.090) (0.192) (0.215) (0.077) (0.107) (0.110)
INVESTMENTB 0.349 0.269 0.271 0.200 0.212 0.333 0.325 0.213 0.116 0.264
(0.126) (0.247) (0.240) (0.397) (0.373) (0.147) (0.155) (0.390) (0.593) (0.316)
BANK 0.051 0.046 0.047 0.040 0.040 0.049 0.047 0.052 0.063 0.053
(0.191) (0.283) (0.227) (0.310) (0.309) (0.211) (0.223) (0.207) (0.149) (0.326)
PARENT -0.126 -0.152 -0.157 -0.152 -0.159 -0.128 -0.128 -0.108 -0.151 -0.117
(0.351) (0.262) (0.248) (0.267) (0.245) (0.348) (0.349) (0.464) (0.381) (0.485)
SALES/ASSET -0.534* -0.897** -0.974 -0.863 -1.049
(0.066) (0.025) (0.371) (0.541) (0.475)
SALES/ASSET 00 -0.518** -0.843** 0.159 0.458 0.148
(0.045) (0.014) (0.903) (0.775) (0.931)
LEVERAGE 0.159 0.663 0.662 0.742
(0.218) (0.528) (0.580) (0.553)
LEVERAGE 00 0.158 -0.490 -0.460 -0.537
(0.195) (0.638) (0.696) (0.662)
SALES VOL 0.513 -0.098 -0.149 -0.120
(0.582) (0.225) (0.113) (0.180)
SALES CAGR 0.667 1.471 1.883 1.654
(0.343) (0.195) (0.128) (0.132)
CONSTANT 1.754*** 2.387*** 2.383*** 2.564*** 2.523*** 1.717*** 1.713*** 2.310*** 4.050*** 2.314***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
IND. DUMMIES Y Y Y Y Y Y Y Y Y Y
OBSERVATIONS 187 187 187 187 187 187 187 187 187 187
R-SQUARE 0.21 0.22 0.22 0.23 0.23 0.21 0.22 0.24 0.09
ADJ. R-SQUARE 0.16 0.16 0.17 0.16 0.17 0.15 0.16 0.16

42
Table 9 Firm characteristics and risk management products

This table shows the effect of firm characteristics on the risk management’s sophistication score. Columns 1-8

show results of standard OLS regressions. In column 9 we use Heckman selection model (Heckman, 1979) to

control for selection biases. Column 10 shows results of a Tobit regression. *, **, and *** indicate significance

at the 0.1, 0.05 and 0.01 levels, respectively. P-values are in parentheses.

OLS OLS OLS OLS OLS OLS OLS OLS Heckman Tobit
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
SECONDG -0.130 -0.130 -0.130 -0.128 -0.131 -0.135 -0.128 -0.135 -0.133 -0.249
(0.399) (0.404) (0.404) (0.409) (0.397) (0.376) (0.406) (0.393) (0.370) (0.355)
THIRDOLDERG -0.058 -0.056 -0.056 -0.023 -0.030 -0.047 -0.039 -0.042 -0.043 -0.142
(0.820) (0.828) (0.826) (0.927) (0.906) (0.852) (0.877) (0.873) (0.863) (0.717)
CEO 0.001 0.001 0.001 0.033 0.033 0.004 0.008 0.026 0.023 -0.102
(0.997) (0.997) (0.998) (0.896) (0.895) (0.987) (0.975) (0.918) (0.922) (0.800)
CFO 0.024 0.026 0.027 0.053 0.052 0.005 0.006 0.012 0.014 -0.019
(0.924) (0.923) (0.919) (0.839) (0.841) (0.984) (0.982) (0.967) (0.957) (0.962)
EXTERNALS 0.473** 0.472** 0.472** 0.445** 0.453** 0.460** 0.460** 0.448** 0.449** 0.748*
(0.042) (0.040) (0.041) (0.044) (0.045) (0.041) (0.037) (0.044) (0.047) (0.081)
EMPLOYEE -0.001 -0.001 -0.001 -0.001 -0.001 -0.001 -0.001 -0.002 -0.002 -0.004
(0.851) (0.857) (0.859) (0.898) (0.890) (0.804) (0.795) (0.725) (0.689) (0.538)
INVESTMENTB 0.877*** 0.875*** 0.873*** 0.820*** 0.822*** 0.851*** 0.855*** 0.803*** 0.802*** 1.203***
(0.002) (0.002) (0.002) (0.006) (0.004) (0.003) (0.003) (0.008) (0.005) (0.003)
BANK 0.076 0.076 0.076 0.070 0.069 0.072 0.073 0.062 0.062 0.117
(0.118) (0.122) (0.122) (0.159) (0.162) (0.135) (0.131) (0.213) (0.188) (0.166)
PARENT 0.015 0.014 0.013 0.014 0.011 0.012 0.013 -0.012 -0.011 0.028
(0.910) (0.915) (0.918) (0.914) (0.931) (0.927) (0.920) (0.927) (0.932) (0.917)
SALES/ASSET -0.017 -0.332 0.159 0.039 0.121
(0.956) (0.472) (0.930) (0.982) (0.964)
SALES/ASSET 00 -0.026 -0.313 -0.404 -0.366 -0.286
(0.923) (0.428) (0.790) (0.798) (0.901)
LEVERAGE 0.138 -0.099 -0.078 -0.731
(0.391) (0.930) (0.942) (0.713)
LEVERAGE 00 0.139 0.219 0.204 0.818
(0.371) (0.844) (0.846) (0.677)
SALES VOL 0.842 0.046 0.039 0.024
(0.472) (0.649) (0.684) (0.864)
SALES CAGR 0.596 0.157 0.180 0.874
(0.480) (0.900) (0.855) (0.615)
CONSTANT 0.530 0.551 0.563 0.705 0.686 0.470 0.494 0.667 0.978 -0.031
(0.114) (0.191) (0.149) (0.118) (0.189) (0.122) (1.011) (0.172) (0.171) (0.971)
IND. DUMMIES Y Y Y Y Y Y Y Y Y Y
OBSERVATIONS 187 187 187 187 187 187 187 187 187 187
R-SQUARE 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.20 0.06
ADJ. R-SQUARE 0.14 0.14 0.14 0.13 0.13 0.14 0.14 0.12

43
Table 10 Summary of findings

This table shows the hypotheses presented in the paper and main findings

Hypotheses Product Categories

Corporate Finance Cash Management Corporate Lending Risk Management

H1 Third-generation and older SFFs Not rejected Not rejected Rejected Rejected

are more financially sophisticated

than first and second-generation

ones.

H2 SFFs with an external CEO or Rejected Not rejected Rejected Rejected

CFO are more financially (only for

sophisticated. external CFO)

H3 SFFs with external shareholders Rejected Rejected Not rejected Not rejected

are more financially sophisticated.

H4 Larger FFs are more financially Not rejected Not rejected Rejected Rejected

sophisticated than smaller ones.

44
APPENDIX

Table A Definitions of the products studied


Product Categories Products Definition

Corporate Finance M&A Advisory M&A advisory involves corporate finance strategy and management directed toward the merging and

acquisition of companies as well as other assets.

LBO An LBO occurs when a financial sponsor gains the majority of the target company’s equity using a

significant amount of senior or subordinated/mezzanine debt (in the form of bank loans or corporate bonds).

MBO An MBO occurs when a company's managers buy or acquire a large part of their company.

Debt restructuring A method used by companies with outstanding debt obligations to alter the terms of the debt agreements.

Cash Management Cash management The strategy and relative tools aimed at optimizing the management and investment of liquidity.

Short money A line of credit that allows the customer to borrow money for liquidity needs. It is a particular kind of short

term lending by banks.

Corporate Lending Factoring A type of asset-financing arrangement in which a company uses its receivables as collateral in a financing

agreement. The company receives an amount that is equal to a discounted value of the receivables pledged.

Financial leasing A written agreement under which a property owner allows a tenant to use the property or asset for a specified

period of time and rent with the right to purchase it at the residual value.

Syndicated loan A very large loan in which a group of banks work together to provide funds to one borrower. Usually one

lead bank takes a small percentage of the loan and syndicates the rest to other banks.

Commercial paper An unsecured obligation issued by a corporation or bank to finance its short-term credit needs, such as

accounts receivable and inventory. Maturities typically range from 2 to 270 days.

Risk Management Future A standardized, transferable, exchange-traded contract that requires delivery of a commodity, bond, currency

or stock index at a specified price on a specified future date. Futures are different from generic forward

contracts in that they contain standardized terms, trade on a formal exchange, are regulated by overseeing

agencies and are guaranteed by clearinghouses.

Option The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a

given stock, commodity, currency, index or debt at a specified price (the strike price) during a specified

period of time.

Swap An exchange of streams of payments over time according to specified terms. The most common type is an

interest rate swap, in which one party agrees to pay a fixed interest rate in return for receiving an adjustable

rate from another party.

Forward A contract that obligates one party to buy and another other party to sell a financial instrument, equity,

commodity or currency at a specific future date.

45
Table B Selection equation

This table reports the results of the probit selection equation used for the Heckman selection model (Heckman,

1979). In the selection equation the dependent variable is a dummy equal to one if the firm surveyed answers the

questionnaire, zero otherwise. Among the independent variables we use ASSET (the average value of the assets

in the three years considered). ASSET is the only variable that is not in the outcome equation. *, **, and ***

indicate significance at the 0.1, 0.05 and 0.01 levels, respectively. P-values are in parentheses.

EMPLOYEE 0.000
(0.916)
PARENT -0.013
(0.919)
SALES/ASSET 0.694
(0.565)
SALES/ASSET 00 -0.069
(0.952)
LEVERAGE -0.141
(0.876)
LEVERAGE 00 0.089
(0.918)
SALES VOL 0.023
(0.728)
SALES CAGR -0.092
(0.909)
ASSET 0.075
(0.421)
CONSTANT -1.105***
(0.000)
INDUSTRY DUMMIES Y
OBSERVATIONS 526

46