Financial theory and the definition of the small business : the role of personal liability as a critical variable in the definition of small business from the perspective of financial management

The discipline of small business finance is characterised by regular reference to the difficulties perceived in applying theories of finance that were derived from and tested in a world of large businesses. Topics such as the optimal capital structure decision, optimal dividend policy, financial signalling and portfolio theory have less relevance to the small private business which does not operate in the public financial markets and for which the objectives of its owners are often not as much wealth maximising as related to their lifestyles. The theory of finance is underpinned by the critical assumption that the firm and its owners are separate, yet the owners of many businesses are personally liable for the financial outcomes of its performance. One of the major difficulties in attempting to reconcile the literature relating to the small business is that it has been defined in so many ways to suit the pragmatic needs of individual researchers that the subject of their various investigations may not in fact have been consistent. This inconsistency has been exacerbated by the needs of researchers and policy-makers in differing economies and differing disciplines to define the small business in different ways. If the small business is to be rigorously and consistently examined, its definition needs to be robust and portable and not arbitrarily determined by the needs of the individual researcher. This thesis contends that the existence of personal liability characterises a set of business enterprises which can be called single identities due to the intertwining of personal and business affairs. It also reviews the literature relating to the definition of the small business across a wide range of disciplines, and finding a lack of consistency but noting the development of the definition to include more behavioural attributes, suggests that the notion of the small business is congruent with that of the single identity. It therefore contends that the single identity distilled from the acknowledged problems in applying the theory of finance to the small business can also be used as an effective, non-arbitrarily determined and portable definition of the small business which can provide a consistent focal point for future researchers in areas associated with the small business. These contentions were tested by using the actual or potential presence of personal liability as the dependent variable in the estimation of two models, the first related to the values of variables associated with the theory of finance, the second related to the values of variables associated with firm size, and by examining the between group differences evident in a range of variables associated with financial theory and size-related characteristics. The results indicate that the values of the variables related to financial theory differ significantly between single identities and other firms, as do the values of variables related to size. This leads to two conclusions: firstly, that the set of firms characterised by the existence of personal liability of their owners behave differently in a financial management context from other firms; and secondly, that the single identity is indeed the small business. It follows that personal liability is worthy of consideration as a focal point for the further investigation of a paradigm of small business finance, and also that personal liability provides a theoretically congruent, objective and portable basis for the definition of the small business