The purpose of this paper is to study organisational characteristics and formations that are important to the establishment of a strong embedded relationship between the small to medium‐sized enterprise (SME) and the financier, which in turn influences the firm's financial decision‐making process.
The study is conducted as a longitudinal, single case study of a fashion firm. The firm prefers equity to debt financing, thus constituting an interesting case of deviation from the pecking order theory of finance. The present paper investigates the rationale behind the firm's financial decision making.
The findings suggest that identity field embeddedness is relevant in the firm's financial decision‐making process because field identification facilitates the formation of embedded relationships between the SME and the financier. The notion of belonging to the same identity field as the supplier of equity finance, while experiencing a distance to the bank, motivates the firm to prefer the more costly equity financing to bank financing. The notion of perceived similarities with the investor seems to set expectations of access to private information.
Banks need to increase their knowledge about different industries and systematically process and store such knowledge to alleviate what SME customers may perceive as a distance to the bank. Banks could also increase their marketability to SMEs by acting as mediators to other organisations, such as industry organisations, authorities and consultants.
The study contributes to the literature on how social relations affect SMEs' financial decision making and the bank‐firm relationship.
