Financial performance of SMEs: impact of ownership structure and board composition

Purpose – The purpose of this paper is to investigate the impact that ownership structure and board composition have on financial performance in a sample of Finnish small to medium‐sized enterprises (SMEs). Design/methodology/approach – The data for this study were collected through a private survey. The financial data were collected from the Voitto+ register and observations were made from 2000 to 2005. The authors employ panel data estimation and 2SLS methods in their analyses. Findings – Results suggest that the ownership structure affects both the growth and the profitability of small private firms. Firms with high managerial ownership levels exhibit higher profitability ratios but have lower growth rates. Firms with high venture capital firm ownership ratios are found to grow faster and are less profitable. The results on board structure suggest that board structure has little impact on the performance of small firms. The only significant result in this context is that firms with outside board members have lower growth rates and are less profitable. Practical implications – The results of this study can be interpreted to indicate that owner‐managers are risk averse and that venture capital firms seek investments with high growth potential. The results could also imply that outsiders are taken on as board members in badly‐performing firms on financiers' requests, or because it is thought that they can enhance performance. Originality/value – The paper is one of the few that shed light on how corporate governance and ownership structures affect the performance of small private firms.