IDEAS home Printed from https://ideas.repec.org/a/kap/sbusec/v26y2006i2p103-116.html
   My bibliography  Save this article

Why do Most Firms Die Young?

Author

Listed:
  • Robert Cressy

    ()

Abstract

A model is developed to explain why most firms die in the first few years of trading. A risk averse entrepreneur with initial capital endowment faces a Brownian motion in net worth over time. To balance return (profits growth) and risk (variance of profits) she adopts a portfolio strategy, choosing market positioning to achieve an optimal combination of risk and return at each instant, given her financial and human capital endowments and attitude towards risk. Failure occurs when the firm’s value falls below the opportunity cost of staying in business. The resulting distribution of failure is Inverse Gaussian, implying, for specific parameter values, a positively skewed failure curve of the type observed in practice. In addition the model presents a novel-measure of management human capital (MHC) which implies that high MHC entrepreneurs will have higher absolute and marginal profits growth than low MHC entrepreneurs at given levels of risk. Copyright Springer 2006

Suggested Citation

  • Robert Cressy, 2006. "Why do Most Firms Die Young?," Small Business Economics, Springer, vol. 26(2), pages 103-116, March.
  • Handle: RePEc:kap:sbusec:v:26:y:2006:i:2:p:103-116
    DOI: 10.1007/s11187-004-7813-9
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11187-004-7813-9
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 53-82.
    2. Mata, Jose & Portugal, Pedro, 1994. "Life Duration of New Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 227-245, September.
    Full references (including those not matched with items on IDEAS)

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:sbusec:v:26:y:2006:i:2:p:103-116. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Rebekah McClure). General contact details of provider: http://www.springer.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.