Non‐bank financing of small and medium size firms in developing economies: Effect of management control systems including large firm affiliation

• Published date: 01 October 2023
• Author: Joseph Nketia,Enoch Kusi Asare,Akwasi A. Ampofo
• Date: 01 October 2023
• DOI: http://doi.org/10.1002/jcaf.22636

Received:  February Revised:  April   Accepted:  April 

DOI: ./jcaf.

RESEARCH ARTICLE

Non-bank financing of small and medium size firms in

developing economies: Effect of management control

systems including large firm affiliation

Joseph Nketia1Enoch Kusi Asare2Akwasi A. Ampofo3

The Bill Munday School of Business, St.

Edward’s University, Austin,Texas, USA

Gupta College of Business, University of

Dallas, Irving, Texas,USA

Department of Business Management,

Springfield College, Springfiled, MA, USA

Correspondence

Joseph Nketia, The Bill Munday School of

Business, St. Edward’s University,Austin,

TX, USA.

Email: jnketia@stedwards.edu

Abstract

This study investigates the relationship between Management Control Systems

(MCS) of Small to Medium Size Enterprise (SME) and how that can sway

financing of working capital (short-term) and long-term assets by non-bank

sponsors/investors. Based on the World Bank enterprise survey, we examined

elements within the data that we classified as key components of management

control mechanisms that can affect the effective running of SMEs to attract non-

bank financing. We developed six hypotheses to test the vigor of the association

of financial report systems and/or subsidiaries status of SMEs and the financing

of working capital and/or long-term assets by non-banks. The results of our tests

illustrate that generally firms with sound financial systems and/or that are sub-

sidiaries of a parent company entice non-banks sponsors to finance the working

capital and long- term assets of SMEs. This study contributes to the financing

literature by examining MCS employed by non-banks to extend financing to

SMEs.

KEYWORDS

financial reporting, small to medium size firm, working capital, long-term assets, non-banks

1 INTRODUCTION

The source of finance for Small to Medium Size Enterprises

(SMEs) in developing economies has gained considerable

attention from scholars of accounting and entrepreneur-

ship in recent times (Asare et al., ; Cressy & Olofs-

son, ). Using the World Bank enterprise survey, this

research focuses on the adoption of MCS by SMEs and

how that can influence non-bank sponsors or financiers to

make investments in SMEs in developing economies.

Our paper investigates the raising of debt or equity from

non-banks by SMEs firms to finance their short and long-

term assets. Wedefine non-banks to include debt borrowed

from non-bank financial institutions, purchases on credit

from suppliers, advances from customers, money lenders,

friends, and relatives. This study also incorporates equity

finance from venture capitalist, private equity, and angel

investors (O’Tool et al., ). Our research paper extends

the study to include components of MCS that are vital to

non-bank financiers when making financing decisions to

grant debts or equities to SMEs in developing economies to

finance their working capital (short-term financing) and or

long-term assets (fixed assets financing).

Prior research papers haveheavily focused on the raising

of debt or equity from banks and other financial insti-

tutions by SME in developing countries (Carbo-Valverde

et al., ; Yifu & Xifang, ). Prior research on financ-

ing for SMEs has not explored non-bank investments in

SMEs and the elements that influence such investments. In

addition, there are limited studies on how MCS can impact

J Corp Account Finance. ;:–. ©  Wiley PeriodicalsLLC. 143wileyonlinelibrary.com/journal/jcaf