Management control systems, business financial literacy and financial leverage in business-incubated start-ups

Abstract

Entrepreneurs manage the capital structure of their start-ups to align the assumption of financial risk with their risk appetite. We focus on the ways in which management control systems (MCS), categorized as financial and non-financial MCS, serve as determinants of financial leverage in start-ups. Of particular interest is the influence of entrepreneurs' financial literacy on this relationship. We test these associations on a sample of business-incubated start-ups by combining survey and archival data. Our results show that financial MCS are negatively associated with financial leverage, unlike non-financial MCS, which are positively related. Entrepreneurs’ financial literacy mitigates the impact of these associations. Overall, our aim is to shed light on how start-ups navigate the trade-off between taking risks and controlling their operations. In addition, we add to the growing literature on the adjustment of financial leverage and the role of MCS and financial literacy in managing such leverage.