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Risk(ing) sophistication: towards a structural equation model for risk management in small and medium-sized enterprises

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  • Ilka Heinze
  • Thomas Henschel

Abstract

The purpose of this paper is to highlight critical success factors for establishing sound and effective risk management in small and medium-sized enterprises (SMEs). In particular, our research tests the effect of personal risk propensity and financial planning sophistication. Based on a survey among 270 SMEs, we apply a structural equation model (SEM). Our results show that personal risk propensity and sophistication of financial planning have a significant effect on the quality of risk management. SME managers with a higher risk propensity show better risk management sophistication in risk management organisation and in the risk management process. Additionally, the formalisation of the financial planning in SMEs is positively associated with risk management sophistication. Furthermore, the study explores the link of risk management sophistication and business performance. In that way, we propose a new theoretical research framework which can be used to study risk management sophistication in a comprehensive manner.

Suggested Citation

  • Ilka Heinze & Thomas Henschel, 2021. "Risk(ing) sophistication: towards a structural equation model for risk management in small and medium-sized enterprises," International Journal of Entrepreneurship and Small Business, Inderscience Enterprises Ltd, vol. 44(4), pages 386-412.
    • Handle: RePEc:ids:ijesbu:v:44:y:2021:i:4:p:386-412
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