Are Small Family Firms Financially Sophisticated?

We study the drivers of the financial sophistication of 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 include which generation of the family owns the firm, the presence of a non-family CFO and the existence of a non-family shareholder. We analyze how the impact that these factors have on the level of sophistication varies across the following financial product classes: 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 structures increase the use of non-basic financial products.