Bootstrapping and the financial condition of small firms

Abstract

PurposeThe purpose of this paper is to investigate relationships between financial condition and the use of bootstrapping in small firms.Design/methodology/researchA total of 901 manufacturing firms were selected from a comprehensive financial database containing income statement and balance sheet records. Surveys were sent to each of these firms and 186 firms returned usable surveys. Survey responses on bootstrapping techniques were compared with financial data for these 186 firms. Both the initial financial status and the financial status of these firms two years later were analyzed.FindingsThe results indicate that highly levered, illiquid, and underperforming firms were more likely to use certain bootstrapping methods than other firms, and that the methods they used may have been detrimental to future firm performance.Research limitations/implicationsThe findings support a resource dependence model and raise questions as to why financially constrained firms chose to use particular bootstrapping methods. Generalizability of the study is limited due to the homogeneous sample of manufacturing firms and due to the sample and recall biases associated with surveys.Practical implicationsSmall business owners should understand the options available for bootstrapping as well as the importance of proactive as opposed to reactive financial strategy.Originality/valueThis is one of the first empirical studies that investigates the relationship between financial condition and bootstrapping, and it provides insight into how and when small firms bootstrap as well as some potential implications of bootstrapping on firm outcomes.