Financial distress likelihood of European SMEs in times of economic policy uncertainty: The role of family ownership and performance aspirations

This work examines the relationship between economic policy uncertainty (EPU) and financial distress likelihood (FDL) in a panel of 145,611 European small and medium-sized enterprises (SMEs) over a ten-year period (2012−2021). Our analysis reveals a positive link between EPU and financial distress, which indicates that heightened uncertainty increases the likelihood of financial distress for SMEs. In addition, the study explores the moderating impact of family ownership and documents that family-owned SMEs are more resilient to increasing EPU. Interestingly, family firms performing below aspirations show greater resilience to EPU, resulting in a lower likelihood of financial distress. These findings offer new insights into the challenges faced by SMEs during periods of economic uncertainty and emphasize the protective role of family ownership. Our results have important implications for SME managers, family business owners, and policymakers by highlighting the need for tailored strategies to support SME survival during volatile times. • We explore the impact of EPU on financial distress likelihood of European SMEs. • Analyses are based on a panel of 145,611 SMEs from 24 countries between 2012 and 2021. • SMEs' risk of financial distress rises with increasing EPU. • Family ownership mitigates the positive effect of EPU on financial distress likelihood. • Family SMEs performing below their aspirations are more resilient to rising volatility.