Research is a process of intellectual discovery that compares the system thinking of how the real world works with the real world itself. System thinking can mean different things in the context of different research discipline, suggesting that this is more than just a collection of tools and methods, it is also an underlying philosophy. Research in finance is generally accepted as being socially and scientifically oriented as appropriate standards of scientific enquiry are applied to social science rather than natural phenomena. Therefore, researching financial issues is categorised as a social science that studies how people think about, behave towards and make decisions regarding financial issues. Finance need to be understood from a conceptual and intuitive standpoint in order for individuals to analyse and make financial decisions effectively.
How to acquire knowledge involves three substantive issues: the nature of belief, the basis of truth and the problem justification (Ryan et al., 2002). The source of belief that assumes knowledge can be known a priori rather than from observation or experience, is called
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abstraction. The rationalist argues that the conceptualisation of perfect capital markets can be understood and reflected upon by the exercise of reason alone. By contrast, another epistemological approach called empiricism, argues that knowledge is uniquely determined by experience. Empiricists claim that experience can represent a justification of beliefs about what we know (Ryan et al., 2002). Both empiricism and rationalism focus on the source of knowledge and can be classified under the umbrella of positivism.
Epistemologically (i.e. what is known to be true or should be), regarding acceptable knowledge in the field of finance, this research follows positivist methodology. Positivists argue that true belief is grounded in what people perceive and it is derived from a value- free independent reality (Bryan and Bell, 2011). In other words, the positivist approach suggests that social reality is independent from human perception. Positivist research only records facts that can be collected and analysed independently and quantitatively (May, 1997). This approach has an advantage for testing hypotheses and identifying causal relationships between variables as predictive tools (Burrell and Morgan, 1979), as well as providing support for quantitative findings. Hence, the ontological consideration that is related to the existence of something has an independent reality apart from a person’s perception of it. The preposition that truth has no objective basis could be said to be true, if knowledge is a product of minds. Such a view means there must be justification and verification through observation to prove it. The principle informing the role of orientation for the role of theory in this research is deductive, which is to test the theory. Testing the theory means that predictions can be made on the basis of the previously observed and explained realities and their inter-relationships.
4.2.1. Positivism and Post-Positivism
Positivism is an epistemological position that advocates the application of the methods of natural science to the study of social reality and beyond (Bryman and Bell, 2007). In addition, positivists believe that reality is stable and can be observed without interfering with the phenomenon being studied. The paradigms of modern research in finance are inspired by positivist philosophy. This view is supported by Frankfurter and McGoun (1999) who argue that research in financial economics is dominated by positivism. In principle, the philosophy of positivism will be based on two distinct approaches to
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knowledge (Ryan et al., 2002). The first approach is grounded within the context of rational processes, it relates to knowledge about what can be known a priori and does not have to be perceived. The second approach is grounded in the object of enquiry. The first one follows the ideas of Socrates and Plato and is known as ‘rationalism’. In finance, the concepts of ‘ideal’ or ‘perfect’ capital markets follow platonic abstraction. If this is applied, the idea is not realistic since, in the real world, there is no perfect capital market which assumes that managers behave rationally all the times. So there is an absence of flotation costs, there are no taxes, no transaction costs and the situation is under certain conditions, therefore capital structure is irrelevant (Modigliani and Miller, 1958).
In turn, ‘empiricism’ follows Aristotle’s idea that knowledge may be gathered through observation and categorisation. It also challenges the existence of the ideal form. This position is based on the following principles: (i) accepting only phenomena and hence knowledge that can be warranted as knowledge (the principle of phenomenalism); (ii) the hypothesis can be tested based on the theory and allows an explanation to be assessed (the principle of deduction); (iii) the knowledge is a result of collecting of facts based on laws (the principle of induction); (iv) the science must be value free or objective; (v) and there is a difference between scientific statements which is the domain of scientists and normative statements, because the truth cannot be confirmed by the senses.
Accordingly, following empiricism, this research will be concerned with what is discerned to be real or reality subsisting within objects or realism. Realism represents the common-sense view that a thing has a reality which is independent of perception. Likewise, the approach of empirical realists to determine the truth about reality is to take what is claimed and compare it with empirical evidence, so it can be a corresponding theory of truth. However, there is another idea that rather than being correspondent, the reality of experience is a mental representation as well. Knowledge is therefore mentally constructed and the truth does not correspond with reality but is coherent with the individual or with beliefs of others. This position is different from the idealist who concludes that reality is a construction of society and it is not the construction of minds.
By way of comparison post-positivism, or interpretivism, is an epistemology stance that is critical of positivism. If positivists believe that there is independency between the object and subject of research, post-positivists accept that the background, knowledge and values of the researcher can influence what is observed. Thus, interpretivism is predicated
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upon the view that a strategy is required to attain the subjective meaning of social science. Post-positivists are profoundly influenced by Weber’s conception called Verstehen
(Bryman and Bell, 2007). The fundamental difference between social science and natural science is that social reality has meaning and therefore human action is meaningful; the task of scientists is to interpret their actions from their point of view. Therefore, the social phenomena and their meanings are continually being accomplished by social actors and social objects are socially constructed.
4.2.2. Philosophical Discussion and Rationale for the Choice of Approach
This thesis follows the methodology of positivist empiricism in order to provide evidence from within the financial disciplines and particularly in the field of corporate finance. The reason for this choice is that empiricism accepts the distinction between theoretical and empirical domains of discovery. The central thesis of positivist empiricism is verification, thus only empirical observation through the process of validation is cognitively meaningful.
Both the research traditions of positivism and post-positivism/interpretivism have their own approaches to detecting the truth of reality. The positivist approach suggests that social reality is independent from human perception. However post-positivism argues that the idea of social reality is a construct and a result of the human’s mind and is therefore subjective. Positivists believe that the role of researcher is limited to data collection and interpretation in objective way (May, 1997). This approach is useful for testing hypotheses and identifying causal relationships between variables to predict reality (Burrel and Morgan, 1979). By contrast, post-positivism focuses on the subjectivity of the individuals who are observed as well as those doing the observing (May, 1997) and can be more responsive to any idiosyncrasies of the observed objects. Even though both use data sets, the positivist uses quantitative data analysis and post-positivists focus on qualitative factors such as perceptions and opinions of those participants in the study.
This thesis follows the paradigms of financial economics created by positivists such as Milton Friedman, Robert Lucas and Eugene F. Fama. However, since reality is independent from perception, realist methodology will be applied. Positive realists
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maintain that reality exists within the objects of perception and that the construction of behavioural reality and the way to determine the truth is to compare what is claimed with empirical evidence to create a corresponding theory of truth (Ryan et al., 2002). This idea is relevant to the situation of family firms in that a capital structure decision is not value neutral, the family is motivated inside not only based on the peak hierarchical aim of the firm, which is maximising the value of shareholders, but also to preserve SEW. This observation means that the theories individuals construct are coloured by normative views of how the world should be organised (North, 1990). Accordingly, this thesis uses a quantitative research method to support the data analysis process. The determinants of capital structure are derived and quantified from the aim of family firms to preserve socioemotional wealth. To achieve this aim families will: i) keep control of and influence over the firm’s operation, ii) renewal of family bonds through dynastic succession, and, iii) binding social ties.