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Financial bootstrapping of Financial

bootstrapping
informal micro-entrepreneurs in of micro-
entrepreneurs
the financial environment
A moderated mediation analysis 1533
Eijaz Ahmed Khan Received 10 July 2019
Revised 15 November 2019
Business Administration Discipline, Khulna University, Khulna, Bangladesh, and 20 December 2019
5 February 2020
Mohammed Quaddus Accepted 5 February 2020
School of Marketing, Curtin University, Perth, Australia

Abstract
Purpose – This study first examines whether the capital structure served as a mediator between financing
mix and firm performance. Furthermore, the authors investigate whether this mediation effect was moderated
by the financial environment. Grounded in the pecking order theory (POT) and dynamic capability view (DCV),
this study extends these concepts by configuring all links to a moderated mediation model.
Design/methodology/approach – The study uses the structural equation modelling (SEM) approach and
multiple regression analysis using “Hayes PROCESS macro” to empirically examine the model using data
collected from 384 informal micro-firms operating in Bangladesh.
Findings – In the mediation analyses, results found that capital structure was a mediator in the link between
financing mix and firm performance. In further moderated mediation analyses, outcomes confirmed that this
mediation effect was moderated by the financial environment.
Research limitations/implications – This investigation shows paths for future research including
implications for theory advancement and intervention development.
Originality/value – This investigation offers the first step towards examining a moderated mediation effect,
using POT and DCV, of the relationship between financial environment, financing mix, capital structure and
firm performance.
Keywords Financing mix, Capital structure, Financial environment, Moderated mediation model, Pecking
order theory, Dynamic capability view
Paper type Research paper

Introduction
Informal entrepreneurship economic activities – usually seen in many developing economies
– contribute significantly to poverty reduction and employment generation, due to
insufficient job openings in formal enterprises and the fast increase in urban residents (e.g.
Williams and Shahid, 2016; Khan and Quaddus, 2017; Khan, 2018). According to the ILO
(International Labour Organization) (2018), entrepreneurship in the informal sector generates
86 per cent of employment in Africa and 69 per cent in the Arab States, while in Asia and the
Pacific regions 68 per cent, in the Americas 40 per cent and in Europe and Central Asia 25
per cent.
In a developing economy, informal entrepreneurship operations refer to a self-employed
person, a household or a few people owning and managing an undeclared business with few
governmental controls and regulations (Williams and Krasniqi, 2018; Khan and Quaddus,
2017; Khan, 2017). It covers a wide range of activities which are not limited to manufacturing
International Journal of Sociology
or services, but retailing or other businesses (Khan and Quaddus, 2015a, b). and Social Policy
In developing countries, informal entrepreneurs face multiple growth constraints Vol. 40 No. 11/12, 2020
pp. 1533-1550
including but not limited to the lack of regulations and policy, poor physical © Emerald Publishing Limited
0144-333X
infrastructure, difficult entry to markets, poor institutional provisions, lack of security, DOI 10.1108/IJSSP-07-2019-0138
IJSSP etc. (e.g. Rothenberg et al., 2016; Beck et al., 2015; Distinguin et al., 2016; Khan and
40,11/12 Quaddus, 2018; Khan et al., 2013; Khan and Quaddus, 2018; Khan et al., 2020b, 2020c).
However, past studies and increasing number of works in the literature have reported
the importance of financial difficulties for informal entrepreneurs (e.g. Lemma, 2015;
Koku, 2015; Khan et al., 2020a). Any type of access to funding (e.g. formal or informal)
may reduce financial limitations for both the start-up investment of informal
entrepreneurs and subsequent growth of their business. However, access to finance is
1534 necessary but not a sufficient condition for successful start-ups and enterprise growth
for all the times. Because there is evidence from developing countries indicates that
informal entrepreneurs consume entire or partially collected or acquired loans instead of
investment thus really creating challenges for capital providers when making funding
decisions and managing the repayment of funds (Shah and Khan, 2007).
Notable differences are present in the financial mix in relation to capital structure (Khan
et al., 2020a). Formal capital providers (e.g. banks, government agencies, non-governmental
orgnisations [NGOs], etc.) place their emphasis on core information linked to financial reports,
rules and enforcement. On the other hand, informal lenders place their trust in soft
information connected to personal networks, image and reputation of informal entrepreneurs,
coercion, etc. Due to severe information asymmetry (e.g. lack of formal financial reports),
many informal entrepreneurs in developing countries face obstacles in seeking loan
opportunities from formal sources. Therefore, informal sources may be essential for informal
entrepreneurs. Conversely, as informal finance nearly always requires a high cost for capital,
formal finance might be suitable or reducing financing difficulties. Therefore, it remains
unclear whether informal entrepreneurs can benefit from the different forms of formal or
informal financial mix and their structure, which provides the question requiring empirical
investigation (Winborg, 2015).
To address the research question, grounded in the pecking order theory (POT) (Donaldson,
1961) and dynamic capability view (DCV) (Teece et al., 1997), we configure financial
environments with the financial capital of informal entrepreneurs and their firms performance.
We argue that financial environments are becoming more complex over time, and that informal
entrepreneurs operating in a financial environment need to determine the best capital structure
from different financing alternatives (Etemad, 2004). The generosity of a financial environment
reduces the higher level of fund uncertainty, and therefore, permits informal entrepreneurs to
take a reduced amount of risk in pursuit of their firms growth (Gathungu et al., 2014). In general,
financial capital in terms of financing mix and capital structure are the determinants of micro-
firm performance (e.g. Yazdanfar, 2012; Abbasian and Yazdanfar, 2012). However, we argue
that it is not only the diverse financing mix and a good capital structure that determine
performance. Instead, financing mix determines the capital structure, and capital structure
further facilitates firm performance. The literature also argues that the financial environment
influences firm performance (Van Dijk, 1996). However, several studies showed that financial
environment does not directly influence the performance of many firms; it may moderate
somewhere between different types of financial capital (e.g. Rijsdijk et al., 2011; Gr€ unhagen,
2008). Successful firms may choose their financial alternatives to achieve a good fit with the
financial environment (Audia et al., 2000). Therefore, the real story of handling the financial
environment, the capital structure, and financing options to achieve firm performance is
unknown. Therefore, this study attempts to investigate the missing mediating link between the
capital structure, the financing mix and firm performance. Furthermore, this study examines a
moderated mediation link between the capital structure, the financing mix and the financial
environment towards improving firm performance.
In the context of these gaps and calls for research, we applied a mix method approach
(Creswell and Plano Clark, 2017). Following the results of content analysis, a questionnaire
survey was conducted for more than a four-month period (February–July 2016) in Bangladesh,
and we find that there is a moderated mediation link between the proposed factors. The survey Financial
was conducted among 384 Bangladeshi informal micro-firm owners from the different sectors, bootstrapping
such as manufacturing, retail and service in Bangladesh. We analysed the data by using the
partial least squares structural equation modelling (PLS-SEM) technique (Hair et al., 2011) and
of micro-
multiple regression analysis by Hayes PROCESS macro (Hayes, 2013). entrepreneurs
The current study offers some vibrant contributions to the present literature with regard
to theory and application. Mainly, the outcome of the research makes an explanation to the
current fragmented findings on the interrelations of financing mix, capital structure, financial 1535
environment and firm performance and accordingly extends the POT and DCV.
Policymakers and relevant agencies will be highly benefited from the findings of this
research as it will unfold for them to set financial resource policies to generate the best
performance of micro-firms. It will also assist the informal micro-entrepreneurs to scan their
financial environment carefully before implementing a financial resource strategy in the
context of specific financial environment settings.
Further, the paper is organised as follows: in the next section, a research model background
is discussed with the proposal of research hypotheses. In the subsequent section, the research
methods with item measurement and statistical tools are presented followed by discussion and
implication of the findings. Finally, it presents the limitations and future directions.

Research model background

POT (Donaldson, 1961) suggests that firms usually rely upon informal sources of finance
over formal sources. If the investment fund is not sufficient from the informal sources, then
firms may or may not move to seek credit from formal financing, and if they do, they need to
evaluate different formal capital alternatives to reduce the costs of asymmetric information
(Luigi and Sorin, 2009). That is because, financial institutions need information in order to
decide whether to offer funds, what type of funds to provide to which customers and at
what rate. However, in practice, there are problems in acquiring information from informal
entrepreneurs due to reasons such as lack of records maintained by the owners and high
transactions cost of gathering this information. Because of this information asymmetry,
financial institutions are unable to differentiate between the high-risk and low-risk
borrowers and face problems of adverse selection (hidden information) and moral hazard
(hidden action) (Gamage, 2015; Florin and Simsek, 2007). More specifically, “adverse
selection” occurs when information attached to the borrower’s project risk, benefit and
credits is less known by financial institutions than borrowers. Therefore, financial
institutions, in the relative disadvantaged position, are only able to increase lending rates to
lower potential risk of credit losses. On the other hand, “moral hazard” happens when the
borrower has already obtained the loan. Financial institutions cannot entirely control and
know what actually the borrowers use loans for and whether they would pay the money
back or not; the borrowers are likely to take risks to default on the engagement (Craig et al.,
2009; Michael and Combs, 2008).
In the context of informal entrepreneurship in emerging countries, informal
entrepreneurs depend on several informal and formal alternatives for gathering fund
ranging from own or family savings, friends or relatives, colleague or neighbors, banks,
NGOs, govt. agencies and so on (Khan et al., 2020a). Although internal sources carry a high
level of interest rate, informal entrepreneurs prefer these sources to avoid the complex
administrative procedures of external sources (Aga and Reilly, 2011). However, too much
dependency on the internal sources makes micro-firms more vulnerable if they are not able
to raise capital from external sources (Coleman, 2007). Therefore, dynamic capability of
informal entrepreneurs may matter to collect capital from the financial environment. In this
connection, the DCV can explain informal micro-firms’ ability to identify appropriate
financial resources, to reconfigure and build other resources in the stage of financial
IJSSP environment dynamic changes to reach better performance (Teece et al., 1997). The DCV
40,11/12 framework also suggests that a micro-firm having access to financial resources is not well
enough, and it needs to have the ability to process resources by effectively scanning the
financial environment factors. Arguably, favourable financial environment has been linked
positively with a range of financial resource strategies and financial options available to
firms to address the moderated mediation analysis (Lumpkin and Dess, 1996; Wiklund and
Shepherd, 2003).
1536 The theoretical conceptualisation of the financial resources in terms of capital structure
and financing mix has been evident from the literature. Aga and Reilly (2011) define financing
mix as an ease or difficulties to access to finance, while Cassar’s (2004) definition focuses on
identifying the types of financing. The link between the financing mix and firm performance
has been established by micro-firm researchers. (e.g. Yazdanfar, 2012; Yazdanfar and
Abbasian, 2013; Cavalluzzo and Wolken, 2005). Therefore, the direct influence of financing
mix on firm performance (c in Figure 1) will be used to develop further hypotheses.
The capital structure of the firm denotes the mixture of its financial obligations such as
procedural requirements for acquiring loan, time horizon, cost of capital and so on (Sirmon
et al., 2007). A good combination of financial obligations is an indication of firm capital
structure fitness. That capital structure decision is critical since entrepreneurs are often faced
with the question of whether to finance their ventures through debt or equity or the
appropriate combination thereof. A significant number of entrepreneur failures are attributed
to inadequate or inappropriate capital structure, and it is important to understand the factors
that determine this combination. A better grasp of the variables that influence capital
structure decisions may help in improving future growth of firm. Scholars have considered
the capital structure as a key feature for the creation and growth of any firm (e.g. Berger and
Di Patti, 2006; Mesquita and Lara, 2002; Hadlock and James, 2002). Therefore, the direct
influence of capital structure on firm performance (b in Figure 1) will be used to develop
further hypotheses.
Financing mix should also be related to capital structure. Financing mix for a firm is
associated with different levels of benefits, time, procedures, risk and costs (Kochhar, 1997).
Therefore, the financing mix should be viewed as an antecedent to capital structure.
Financing mix of personal or family member’s savings less likely possesses higher risk and
high cost of capital and no procedural arrangements and time obligations (Khan et al., 2020a).
On the other hand, other informal or semi-formal financing mix such as relatives, friends or

Capital
structure (M)
Financial
environment (W)

a
b

Financing mix c or c’
Performance (Y)
(X)

Figure 1. Note(s): The moderated mediation model (Model 7) is adopted from Hayes (2013).
The conceptual M – mediator; X - independent variable; Y – dependent variable; W – moderator;
research model a, b, and c or c’ are direct links and the concept of mediation effect
known persons might hold a moderate level of risk, cost, time and process (Khan et al., 2020a; Financial
Tsai, 2004; Allen et al., 2005). Formal moneylenders such as banks usually lend with bootstrapping
restrictions based on collateral (Cousin, 2011) and trust formal organisations such as
government or the courts to enforce repayment of credit contracts (Booth and Zhang, 2001).
of micro-
Therefore, the direct influence of financing mix on capital structure (a in Figure 1) is used to entrepreneurs
develop further hypotheses.
1537
Mediating role of capital structure
The associations among capital structure, financing mix and firm performance need to be
considered because the financing mix is able to exert regulations over firms via their capital
structure. Firms collect finance from different types of financing mix by considering the
financial structure and turn them into products and services. Constraints related to a
financing mix and financial structure increase the financial obligations of firms. For
example, the informal or semi-formal financing mix helps firms to avoid complex
procedures for acquiring loans (Sirmon and Hitt, 2003). Furthermore, the empirical evidence
shows that firms use equity capital due to no cost or lower cost of capital. For instance,
when arranging financing alternatives in particular, firms favour equity financing that is
closely external or internal to the firm as it is the low-cost component of the financing mix
(Donaldson, 1961; Romano et al., 2001). Thus, capital structure is a multiplex factor for
informal micro-entrepreneurs because it influences strategic choices on the financial mix
(Khan et al., 2020a) that favour opportunity exploitation. Only those firms that manage the
fit of their capital structure with the particular financing mix may be able to alter
advantages. Therefore, as per the earlier discussion, the study proposed the following
hypothesis:
H1. The financing mix and firm financial performance relationship is mediated by the
capital structure.

Moderating role of financial environment

Firm performance does not happen in a vacuum but within a certain financial environment
which has challenges and opportunities. Scholars define financial environment as a mix of
financial instruments, markets and other institutions (formal and/or informal) that operate in
an economy (Fase and Abma, 2003). In other words, it can be defined as the environment
within which business work is composed of financial systems and governance, institutions
and markets (Melicher and Norton, 2013). Financial environment elements are important
measures in an effort to regulate the decision making of firms. A sound financial environment
provides protection for investors and ensures their ability to exercise their rights. In the
context of micro-firms operating in developing countries, the financial environment can relate
to the rules and regulations set by credit providers, supportive attitude from moneylenders,
interest rate policies, etc. (Khan et al., 2020a). Firm operations and resource selection activities
are strongly connected by economic, social and market-related matters (Gnyawali and Fogel,
1994; Khan, 2018). A decent financial environment defends firms from being subjugated and
confirms firm progress (Van Dijk, 1996; Khan and Quaddus, 2015a, b). For example,
favourable rules and regulations by the government ensure good financing mix and capital
structure markets. Similarly, many entrepreneurs open small start-ups when the public
provides a generous attitude. Therefore, the financial environment possibly moderates the
financing mix and capital structure relationship (Lumpkin and Dess, 1996; Wiklund and
Shepherd, 2003). The DCV approves the financial environment role (as a moderator) between
the capital structure and financing mix. The favourable financial environment delivers a
higher level of predictability in the financing mix, and therefore, permits firms to minimise
IJSSP their capital structure risk (Gathungu et al., 2014). In other words, the financial environment
40,11/12 can play a key role in regulating financial resources and influencing the determination of the
financing mix and influence to determine the capital structure. Therefore, in light of the
earlier arguments, the following hypothesis is put forward:

H2. The financing mix and capital structure relationship is positively moderated by the
financial environment.
1538

Moderated mediation hypothesis

Although we have argued that the links between financing mix and firm performance are
mediated by capital structure, and that the financial environment moderates the link
between capital structure and financing mix, we expected the strength of these
relationships to differ across micro-firms that are operated in different financial
environments. Thus, we suggest that the financial environment moderates the influences
of the financing mix on firm performance via the capital structure. The integration of DCV
and POT recommends that balance between the key variables, such as the financial
environment is critical for the best performance and influences how financial resources will
be configured in order to be beneficial (Lumpkin and Dess, 1996). It is also recommended
that in organisations several financial environment elements and financial resources
should be formed into clusters and configurations (Wiklund and Shepherd, 2005).
In line with the munificence concept, Gr€ unhagen (2008) also suggests that the investigation
of accurate resource procurement efforts would need environmental scanning and
analysis. The perceived financial environment may help to perceive credit alternatives and
capital structure strategies during micro-firm operations. Prior studies also confirm the
direct, moderating or mediating links with firm performance. The earlier hypotheses
correspondingly recommend the moderated mediation link between financial environment,
financing mix, capital structure and firm performance, and thus, whether moderated
mediation link between these factors requires an empirical investigation. Hence, the
following hypothesis are developed.

H3. The strength of capital structure mediation in the relationship between financing
mix and firm performance is positively moderated by the financial environment.

Moderated mediation model

Figure 1 shows the proposed moderated mediation model. This research model is
developed based on the hypothesised relationships as discussed earlier. The model
displays several direct links: financing mix to capital structure, capital structure to firm
performance and financing mix to firm performance. The model also presents the
mediating effect of capital structure between financing mix and firm performance
denoted by the links a, b and c and the moderating role of the financial environment.
Finally, the model offers the moderated mediation effects by explaining that the financial
environment moderates the mediating relationship. The model is based on DCV and POT
to justify the moderated mediation link. To the best of our knowledge, the current study
is the first one to test moderated mediation for this research question. In addition, we
claim that this research extends POT and DCV by examining the mediating effect of
financial approaches between the financial environment and performance in different
types of financial settings as current studies of DCV fail to explore such multiplex links.
Figure 1 presents the hypotheses in the form of a conceptual research model. Figure 2
presents the hypothesised model in form of a statistical diagram.
 eMi Financial
bootstrapping
1
of micro-
entrepreneurs
Mi

a1i eY 1539
bi
a2i 1

c’
X Y

a3i

XW

Note(s): The moderated mediation model (Model 7) is proposed by Hayes (2013).

Figure 2.
Conditional indirect effect of X on Y through Mi = (a1i + a3iW)bi; direct effect of The statistical diagram
X on Y = c’

Methodology
Survey instrument and measures
To identify relevant factors and items of interest, we conducted as a qualitative field study
in-depth interviews with eight informal micro-entrepreneurs after the literature review.
The scale items were selected and modified for the survey questionnaire following the
findings of the qualitative field study. Three items were adapted from Abbasian and
Yazdanfar (2012) to measure the financing mix construct. Similarly, three items were taken
from Sirmon and Hitt (2003) to measure the capital structure construct, while three
measures of financial environment were adapted from Gnyawali and Fogel (1994). For firm
performance, we used four items taken from Engelen et al. (2015). The items were reflective
in nature as recommended by Jarvis et al. (2003). To avoid the “central tendency bias/
error”, when participants’ responses to a central choice “neither agree or disagree” or
“neutral” without indeed meaning it, a six-point Likert scale was developed. These items
are listed in Table II.
Demographic factors also shape the behavioural patterns towards entrepreneurship.
Therefore, we used several covariates such as firm’s type of operation, firm size and firm age
that are often used in entrepreneurship and small business research studies (e.g. Anderson
and Eshima, 2013; Rauch et al., 2009). Furthermore, firm’s type of operation, firm size and firm
age have been found to affect the performance of firms and entrepreneurial decisions
(Anderson and Eshima, 2013; Rauch et al., 2009).

Data collection
We prepared a list and categories of micro-firms by using the Bangladesh Bureau of Statistics
(BBS) District Statistics 2015. The micro-firms were categorised in terms of manufacturing,
trading and services industries for the data collection process. The survey was conducted
IJSSP with informal micro-entrepreneurs from six major divisions (Khulna, Barisal, Dhaka, Sylhet,
40,11/12 Rajshahi and Chittagong) in Bangladesh by applying purposive-convenience sampling
techniques for more than four months (February–July) in 2016. It was important to confirm a
better response rate; therefore, we used location-intercept techniques (Malhotra et al., 2006).
That is, the data collection was carried out in the enterprise environment while participants
generally continued to do their work during the data collection. We employed six trained
surveyors to carry out and gather the finished survey. A survey instrument along with the
1540 explanation of the survey instructions and purpose was delivered to the informal micro-
entrepreneurs. A total of 384 survey questionnaires were completed. For the face-to-face
survey, we received an 81 per cent response rate for the research, which is more than the
minimum threshold level (>60 per cent) (Newcomer et al., 2015). Among the three categories of
industry, the largest responding firms had served their industry for more than seven years
and had six or eight employees and monthly sales of between Bangladeshi taka (Tk.) 35K and
45K. The demographics indicate a close match between our sample and the population of
micro-firms in Bangladesh (BBS, 2015). The details are presented in Table I.

Data analysis
We used the PLS-SEM technique to examine the measurement model, while multiple
regression was applied to assess the moderated mediation links. It is possible to do
simultaneous modelling using the PLS-SEM approach (Chin, 2010). We examined the
measurement model by applying internal consistency, reliability, discriminant validity
and average variance extracted (AVE) tools that are recommended by Hair et al. (2011).
Multiple regression analysis and Hayes PROCESS macro were used to test the
moderated mediation links (Hayes, 2013). We used latent variable scores of the
constructs to run the regression analysis. We obtained the standard errors of the
estimates by non-parametric bootstrapping (Wetzels et al., 2009). We tested the models
by applying the explanatory power, the t-value of each path coefficient and the bootstrap
results of the conditional effect at 95 per cent confidence intervals (Hayes, 2013). To
confirm there is no non-response bias exists in our research, we run a non-response bias
test on the early and late respondents (Groves, 2006) based on some chosen items.

Common method bias

The survey questionnaire was developed by considering the issues of common method bias
(CMB). Numerous sources of CMB are related to items characteristic effects (Jarvis et al., 2003).
In order to manage social desirability bias (SDB) (Crowne and Marlowe, 1960), we highlighted
the privacy and confidentiality of our study and introduced as purpose at the beginning of the
questionnaire. Since the nature of the collected data was self-reported, CMB possibly influenced
the observed links (Podsakoff et al., 2003). Therefore, several analyses were conducted to test
the severity of this bias. First, Harman’s one-factor test confirmed the least chance of CMB,
since the first construct only estimated 42.04 per cent of the variance. Additionally, we
examined the variance inflation factor (VIF) values of the constructs, to check the collinearity
issues of the structural model. All VIF values (4.253–1.136) were well below the threshold of 5
(Hair et al., 2011); collinearity is thus not an issue in our model.

Results
Assessment of the measurement model
We confirmed the validity of the constructs by testing the convergent validity and reliability
and discriminant validity. Composite reliability (CR) and Cronbach’s alpha coefficient values
were used to assess the reliability of the construct. As shown in Table II, the results indicate
 No. of Monthly No. of
Financial
Type of operation firms % average sales % employees % Firm age % bootstrapping
Services (n 5 156)
of micro-
E-rickshaw operator 17 11% Below Tk. 25,000 20% Below 3 18% Below 3 23% entrepreneurs
years
Street food vendor 16 10% Tk. 25,001–Tk. 28% 3–5 24% 4–6 years 26%

Tea-stall owner 21 13%

35,000
Tk. 35,001–Tk. 31% 6–8 32% 7–9 years 31%
1541
45,000
Launderer 15 10% Above Tk. 21% Above 8 26% Above 10 21%
45,000
Cobbler 12 8%
Barber 15 10%
Locksmith 8 5%
Dressmaker 19 12%
Watchmaker 11 7%
Computer repairer 9 6%
Plumber 13 8%
Trading (n 5 137)
Plastic goods trader 15 11% Below Tk. 25,000 21% Below 3 21% Below 3 20%
years
Fertiliser trader 8 6% Tk. 25,001–Tk. 27% 3–5 25% 4–6 years 28%
35,000
Leather goods 9 7% Tk. 35,001–Tk. 32% 6–8 32% 7–9 years 32%
trader 45,000
Jute goods trader 11 8% Above Tk. 19% Above 8 22% Above 10 20%
45,000
Dairy and poultry 17 12%
trader
Cloth trader 18 13%
Grocer 15 11%
Stationery trader 9 7%
Vegetables seller 19 14%
Fruits seller 16 12%
Manufacturing (n 5 91)
House builder 18 20%
Bread and cookies 11 12% Below Tk. 25,000 18% Below 3 16% Below 3 16%
years
Blacksmith 9 10% Tk. 25,001–Tk. 28% 3–5 26% 4–6 years 28%
35,000
Goldsmith 8 9% Tk. 35,001–Tk. 34% 6–8 35% 7–9 years 35%
45,000
Herbal hair oil 7 8% Above Tk. 20% Above 8 22% Above 10 21%
45,000
Pickles 8 9%
Candles and wax 6 7%
Paper bags and 8 9%
envelopes
Handbags and 7 8%
wallets
Bed sheets and 9 10%
blankets
Note(s): 1 USD 5 85 Tk (approximately). Division-wise population and/or sample structure: Dhaka (n 5 84) –
services (n 5 35), trading (n 5 30), manufacturing (n 5 19); Chittagong (n 5 77) – services (n 5 31), trading
(n 5 28), manufacturing (n 5 18);, Khulna (n 5 67) – services (n 5 27), trading (n 5 25), manufacturing (n 5 15);
Rajshahi (n 5 61) – services (n 5 25), trading (n 5 22), manufacturing (n 5 14); Barisal (n 5 50) – services (n 5 20), Table I.
trading (n 5 17), manufacturing (n 5 13); Sylhet (n 5 45) – services (n 5 18), trading (n 5 15), Demographics of the
manufacturing (n 5 12) micro-firms
IJSSP Constructs and
40,11/12 references Items Loading CR CA AVE

Financing mix (FM) Our business . . .

Abbasian and FM1 acquires loan from informal sources 0.787 0.809 0.706 0.586
Yazdanfar (2012) (e.g. family members, relatives,
friends, etc.)
1542 FM2 collects loan from semi-formal sources 0.812
(e.g. known persons, moneylenders,
etc.)
FM3 collects loan from formal sources (e.g., 0.701
banks, Govt. agency, NGOs, etc.)
Capital structure (CS) Our business . . .
Sirmon and Hitt (2003) CS1 faces few procedural requirements for 0.836 0.841 0.724 0.639
acquiring loan
CS2 enjoys flexible time frame to repay 0.834
loan
CS3 enjoys lower cost of capital 0.723
Financial environment FE1 Few rules and regulations that govern; 0.712 0.881 0.821 0.714
(FE) Gnyawali and providing a favourable financial
Fogel (1994) environment for our business
FE2 Credit providers (e.g., banks, Govt. 0.897
agency, NGOs, etc.) are in favour of
setting lower interest rate
FE3 There is a supportive attitude from 0.926
lenders (e.g., relatives, friends, known
persons, banks, Govt. agency, etc.)
towards our business
Performance (FP) Our business’s performance is at an
Engelen et al. (2015) acceptable level in terms of . . .
FP1 sales growth 0.874 0.896 0.851 0.683
FP2 income stability 0.798
FP3 return on investment 0.867
FP4 profitability 0.763

Fornell–Larcker discriminant validity

FM CS FE FP

Financing mix (FM) 0.766

Capital structure (CS) 0.033 0.799
Table II. Financial environment (FE) 0.601 0.207 0.845
Assessment of Performance (FP) 0.441 0.043 0.599 0.827
measurement Note(s): FM – financing mix; CS – capital structure; FE – financial environment; FP– firm performance; CR –
properties composite reliability; CA – cronbach’s alpha, AVE – average variance extracted

good construct reliability, as all the values of Cronbach’s alpha and CR were higher than the
threshold of 0.70 (Hair et al., 2011). Item loadings and AVE values were considered to examine
convergent validity. These had satisfactory values of 0.7 and 0.5, respectively (Hair et al.,
2011). All individual item loadings and AVEs were greater than the threshold values, as
shown in Table II. The square roots of the AVE values were compared with the inter-
construct correlations to examine discriminant validity (see Table II).

Assessment of structural model

To examine the proposed moderated mediation link, we adopted the moderated mediation
analysis (Model 7) process guided by Preacher et al. (2007) [1] (see Hayes, 2013). In the current
research, financing mix and financial environment were the independent variables, capital Financial
structure was the mediator, firm performance was the outcome and financial environment bootstrapping
was the moderator. The variables were centred before the calculations suggested by Aiken
et al. (1991). Table III shows the results.
of micro-
Table III finds that the link between financing mix and capital structure is negative and entrepreneurs
significant. The relationship between financial environment and capital structure is positive
and significant, and it is also revealed that the interaction of financing mix* financial
environment is significantly and positively related to capital structure. It infers that financial 1543
environment positively moderates the financing mix and capital structure relationship. The
result supports our H2 and suggested by previous studies (Gathungu et al., 2014). According
to Frazier et al. (2004),moderating roles are best recognised while the link between the
dependent variable and independent variable is significant which is depicted in Table III.
Table III also shows that the link between capital structure and firm performance is positive
and significant. The relationship between financing mix and firm performance is positive and
significant.
Since Table III statistically confirms the moderating role of the financial environment in
relation to financing mix and capital structure, we use this result to find the moderated
mediation effect by proceeding and interpreting the results. Table IV also shows the
conditional indirect effect of financing mix on performance at values of moderator:
financial environment. We see each effect (Low 5 0.007, Average 5 0.015, and
High 5 0.054) given financing mix on performance at the different levels (Low 5
0.993, Average 5 0.000, and High 5 0.933) moderators: financial environment and
corresponding mediators: capital structure. As mention earlier, we found that both the
financing mix and capital structure predict the firm performance; therefore, capital
structure mediates the relationship between financing mix and firm performance. This
result supports the H1 and is consistent with other studies (e.g. Khan et al., 2020a). Finally,
considering all the results from Tables III and IV, we conclude that there is a moderated
mediation effect which means that financial environment moderates the mediation effect of
capital structure between financing mix and firm performance. Therefore, this result
supports the H3.
In the second stage of analysis, we have extended moderated mediation test. In this stage,
firm’s type of operation, firm size and firm age were included in the moderated mediation
model as covariates predicting firm performance. Model fit decreased very little after having
added the covariates, while there seems to be no significant effect of firm’s type of operation,
firm size and firm age (see Table III).

Model-1: H1-Outcome FP Model-2: H2-Outcome CS

FM β 5 0.773; t 5 30.274 (direct effect) β5 0.176; t 5 2.562

β 5 0.104; (LLCL 5 0.0016, ULCL 5 0.2953) (indirect effect)
FE β 5 0.478; t 5 7.079
CS β 5 0.172; t 5 4.516
FE*FM β 5 0.146; t 5 2.050
Note(s): FM – financing mix; CS – capital structure; FE – financial environment; FP– firm performance
In second stage, firm’s type of operation, firm size and firm age were included. In model 1 – type of operation
(β 5 0.136; t 5 1.656), firm size (β 5 0.025; t 5 0.732) and firm age (β 5 0.010; t 5 1.375); in model 2 –
type of operation (β 5 0.098; t 5 0.768), firm size (β 5 0.008; t 5 0.017) and firm age (β 5 0.010; t 5 0.915).
Model fit decreased very little after having added the covariates, while there seems to be no significant effect of Table III.
covariates Assessment of
Significance p < 0.05, p < 0.01 structural model
IJSSP Power analysis (1-β)
40,11/12 We used G*Power 3.1.3 (Faul et al., 2009) to conduct the power test (post hoc) to estimate
the validity of the statistical parameters. The power test is usually defined as the
probability of rejecting a false null hypothesis (H0) (Cohen, 1988). In other words,
statistical power assesses the probability of finding significant associations among the
latent variables when true relationships exist (Baroudi and Orlikowski, 1988). A value of
0.80 is used for power (Cohen, 1988). We estimated power of 0.99 for the base model. The
1544 size of estimated power (0.99) compellingly exceeded the cut-off value of 0.80. Thus, high
power (>0.80) confirmed that the study had adequate confidence in the hypothesised
relationships in the research model.

Discussions and implications

Through the prior theoretical conceptualisation, we have generated some novel insights that
extend our understanding in several ways. First, this research contributes to the
entrepreneurship field and extends the DCV and POT by examining the moderated
mediation role of financial environment between financing mix, capital structure and firm
performance through a valid empirical investigation. These findings are consistent with
existing theories. For instance, the DCV and POT strongly emphasise the marshalling of the
financial environment and resources – without an appropriate selection of financing mix and
transforming it into capital structure fitness, firms cannot maximise their financial outcomes.
Similarly, addition of a financial environment without an appropriate response to the
choosing financial alternatives and turning them into a favourable capital structure is not
possible. Therefore, these would hinder firm performance (Gr€ unhagen, 2008).
Furthermore, the DCV and POT recognise that it is not sufficient for firms to only have
access to types of financial capital; they must also be capable of understanding and searching
for appropriate financing mix decisions from the favourable financial environment so they can
use those choices with more flexibility and lower risk (Teece et al., 1997). In essence, our research
explains why financing mix options have inconsistent influence on capital structure, as
evidenced by several studies (Khan et al., 2020a; Romano et al., 2001; Sirmon and Hitt, 2003) –
when the financial environment is not present, a diverse financing mix is not reasonably
balanced to determine capital structure fitness. This highlights the greater reliance of the
financial environment on financial resources to increase firm performance. Therefore, this
research significantly expands academic understanding of this issue through a valid empirical
investigation that explains the mediation role of capital structure between financing mix and
firm performance which is enhanced by moderation role of the financial environment.
The outcome of this research offers key applications for relevant agencies and policy
makers in developing countries, where the micro-firm plays a vital role in collective output
and employment generation. However, finding suitable access to capital is one of the biggest
hurdles to starting and growing a micro-firm in developing countries. It is not surprising that

FE Effect LLCI ULCI

CS (low) 0.933 0.048 0.031 0.048

CS (average) 0.000 0.066 0.007 0.066
CS (high) 0.933 0.098 0.022 0.098
Table IV. Note(s): Conditional indirect effect of financing mix (FM) on firm performance (FP) at values of the financial
Conditional indirect environment (FM): capital structure (CS); values for quantitative moderators are the mean and ±1SD (standard
effect deviation) from the mean; significance p < 0.05, p < 0.01
an effort to lessen financing restrictions for would-be micro-firm owners is a central goal for Financial
policy makers across the developing world. Policy setting could be misleading due to wrong bootstrapping
or poor specifications of financial environment, capital structure and financing options (Khan
and Quaddus, 2015a, b; Khan et al., 2016). Thus, the experimental link between financial
of micro-
environment, capital structure and financing options and performance of a firm suggests entrepreneurs
some real-world applications for policy settings. Similarly, the study’s findings contribute to
broadening the knowledge and scope of NGOs and donors. The NGOs and local governments
may organise regular monthly or fortnightly consultations by tempting micro-entrepreneurs 1545
along with other stakeholders (e.g. banks, moneylenders, micro-credit providers, etc.). This
kind of interactive discussion would produce scope for sharing and exchanging information
and ideas among external parties and would offer opportunities. This, in turn, would lead to
nurturing more financial bootstrapping features of informal micro-firms (Khan et al., 2020a).
Our findings show that a diverse financing mix (e.g. informal, semi-formal and formal) has a
negative effect on capital structure in the absence of a favourable financial environment. This
indicates that uneven competition between moneylenders can influence the terms of credit. This
problem is especially severe in developing nations. In this case, financial environment provides
an important moderating role in controlling the financial intermediaries by providing
guidelines. Similarly, the lower interest rate set by credit providers helps to foster the growth of
informal micro-firms. Also, a positive public attitude towards informal micro-entrepreneurs
plays an important role. On the other hand, the favourable relationship between an informal
financing mix (personal, family members, relatives, friends, etc.) and establishment of a micro-
firm can be seen as a sign of financial market failure. This result has been very influential in
both policy circles and among academics.
The results of this study have key implications for informal micro-entrepreneurs in a
developing country. As numerous options of financial sources can reduce other aspects of
resource limitations and improve firm performance, choosing the best financing mix related to
the effective transformation of capital structure into firm performance is an important issue for
informal micro-entrepreneurs. Some financial mixes should be considered when informal micro-
entrepreneurs seek financing. Informal micro-entrepreneurs must consider this financing mix
according to their business needs and the attractiveness of their capital structure. The financial
requirements of a firm will vary according to its size and the type. For instance, manufacturing
firms are typically capital-intensive, needing huge amounts of capital. Retail firms generally
need less capital. Informal micro-entrepreneurs also need to continuously scan and respond to
the financial environment because financial environment elements are not static but constantly
changing which affects financial markets. Therefore, this study suggests that informal micro-
entrepreneurs carefully scan and evaluate their financing mix and capital structure, and the
financial environment to gain the maximum benefit for their business.

Limitations and future research directions

This study has some limitations. Firstly, it focuses only on informal micro-entrepreneurs in
Bangladesh. Future studies should check the generalisability of the findings in other
developing nations. We also urge future investigation to compare results between developing
and developed countries. Finally, data were gathered under a cross-sectional design, so the
study contains typical limitations associated with this kind of research methodology. Future
studies would benefit from longitudinal research approaches.

Note
1. We used the SPSS MODMED macro and defined which variables in the model would have the
estimated function of the moderator, independent variables, the mediator and the outcome in the
anticipated analysis.
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1550
Corresponding author
Eijaz Ahmed Khan can be contacted at: eijaz_2@yahoo.com

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