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

Author

Listed:
  • John Watson

    (University of Western Australia)

  • Jim Everett

    (University of Western Australia)

Abstract

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.

Suggested Citation

  • John Watson & Jim Everett, 1996. "Small Business Failure Rates: Choice of Definition and the Size Effect," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 5(3), pages 271-285, Fall.
  • Handle: RePEc:pep:journl:v:5:y:1996:i:3:p:271-85
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    References listed on IDEAS

    as
    1. Evans, David S, 1987. "The Relationship between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 567-581, June.
    2. Alfred R Nucci & Timothy Bates, 1990. "An Analysis of Small Business Size and Rate of Discontinuance," Working Papers 90-2, Center for Economic Studies, U.S. Census Bureau.
    3. 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.
    4. 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.
    5. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    6. 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.
    7. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1989. "The Growth and Failure of U. S. Manufacturing Plants," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 671-698.
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    Cited by:

    1. Rodríguez Fuentes, Christian C. & Maté Sánchez-Val, Mariluz & López Hernández, Fernando A., 2016. "La proximidad geográfica en el contagio del fracaso empresarial en la pyme: Una aplicación empírica con el modelo probit espacia/The Geographic Proximity in the Spillover Effects of Business Failure i," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 34, pages 619-638, Agosto.
    2. Lucio Fuentelsaz & Consuelo González-Gil & Juan P. Maicas, 2015. "What determines entepreneurial failure: taking advantage of the institutional context," Documentos de Trabajo dt2015-05, Facultad de Ciencias Económicas y Empresariales, Universidad de Zaragoza.

    More about this item

    Keywords

    Bankruptcy; Mergers; Acquisitions; Failure Rate;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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