Why do Most Firms Die Young?
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
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mata, Jose & Portugal, Pedro, 1994. "Life Duration of New Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 227-45, September.
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: (Guenther Eichhorn)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.