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Cash Reserve and Venture Business Survival Probability

  • Sheen Liu

    (Youngstown State University)

  • Peter Woodlock

    (Youngstown State University)

  • Howard Qi

    (Michigan Tech University)

  • Yan Alice Xie

    (The University of Michigan-Dearborn)

Registered author(s):

    Both solid business ventures and those not on as firm a footing can fail because they do not manage risk properly. This study shows that start-ups with a positive NPV project can fail because of inadequate cash reserves. We apply the first-hitting time model to analyze the effect of a cash reserve on the business failure density function and the cumulative failure probability for a specific business venture. The analysis of this model shows that business ventures have a much higher survival probability when they reduce their future cash-flow volatility. It is also shown that when risks cannot be controlled or are too expensive to be controlled, then business ventures need to have adequate cash reserves if they are to reduce failure density and cumulative failure probability.

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    File URL: http://jefsite.org/RePEc/pep/journl/jef-2006-11-3-g-liu.pdf
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    Article provided by Pepperdine University, Graziadio School of Business and Management in its journal Journal of Entrepreneurial Finance and Business Ventures.

    Volume (Year): 11 (2006)
    Issue (Month): 3 (Fall)
    Pages: 123-136

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    Handle: RePEc:pep:journl:v:11:y:2006:i:3:p:123-136
    Contact details of provider: Postal: 24255 Pacific Coast Hwy, Malibu CA
    Web page: http://bschool.pepperdine.edu/jef

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    1. Evans, David S, 1987. "Tests of Alternative Theories of Firm Growth," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 657-74, August.
    2. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
    3. Gertler, M. & Gilchrist, S., 1992. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers 92-08, C.V. Starr Center for Applied Economics, New York University.
    4. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06.
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