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Small Business Failure Rates: Choice of Definition and the Size Effect

  • John Watson

    (University of Western Australia)

  • Jim Everett

    (University of Western Australia)

Registered author(s):

    Results of many previous studies on the rate of small business failure suggest an inverse relationship between size of business and propensity to fail. However, it has been suggested that this inverse relationship, between firm size and the rate of discontinuance, may more accurately be characterized as an inverse relationship between age of business and the rate of discontinuance. While some studies have confirmed the positive association between failure and age, they have generally found that a size effect persists even after controlling for age. The central objective of this study is to show how reported failure rates may depend heavily on the definition of failure adopted, and to examine the proposition that the results of previous studies reporting a negative association between propensity to fail and business size may have been driven by the choice of failure definition.

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    File URL: http://jefsite.org/RePEc/pep/journl/jef-1996-05-3-f-watson.pdf
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    Article provided by Pepperdine University, Graziadio School of Business and Management in its journal Journal of Entrepreneurial and Small Business Finance.

    Volume (Year): 5 (1996)
    Issue (Month): 3 (Fall)
    Pages: 271-85

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    Handle: RePEc:pep:journl:v:5:y:1996:i:3:p:271-85
    Contact details of provider: Postal: 24255 Pacific Coast Hwy, Malibu CA
    Web page: http://bschool.pepperdine.edu/jef

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    1. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
    2. James S. Ang, 1991. "Small Business Uniqueness and the Theory of Financial Management," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 1(1), pages 1-13 , Spring.
    3. Jerome S. Osteryoung & Derek Newman, 1993. "What Is a Small Business?," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 2(3), pages 219-231 , Summer.
    4. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "The Growth And Failure Of U.S. Manufacturing Plants," Papers 1-87-5, Pennsylvania State - Department of Economics.
    5. Evans, David S., 1986. "The Relationship Between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries," Working Papers 86-33, C.V. Starr Center for Applied Economics, New York University.
    6. James S. Ang, 1992. "On the Theory of Finance for Privately Held Firms," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 1(3), pages 185-203 , Spring.
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