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Legal Form, Growth and Exit of West German Firms - Empirical Results for Manufacturing, Construction, Trade and Service Industries

Author

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  • Harhoff, Dietmar
  • Stahl, Konrad
  • Woywode, Michael

Abstract

In this paper we discuss determinants of firm survival and growth in Germany within its pre-1989 boundaries. We argue that the legal form adopted by a firm is an important indicator of the riskiness of projects undertaken, and that firms under limited liability should be characterized by higher than average insolvency and employment growth rates. We test these predictions by considering the survival chances and employment growth rates of various types of enterprises in a sample of approximately 11,000 West German firms from all major sectors of the German economy. We distinguish between voluntary liquidation without losses to creditors, and bankruptcy as forced liquidation. We demonstrate that firms under limited liability are characterized by higher growth and higher insolvency rates than comparable firms under full liability. Surprisingly, the likelihood of insolvencies is a non-monotonic function of firm size while the likelihood of voluntary liquidation decreases monotonically. Firms whose owners are approaching retirement age are characterized by relatively high hazards of voluntary liquidation, while the propensity to insolvency is not affected by the owner’s age. The basic empirical results hold in pooled samples as well as in estimates at the level of the one-digit industries of manufacturing, construction, trade, and services.

Suggested Citation

  • Harhoff, Dietmar & Stahl, Konrad & Woywode, Michael, 1996. "Legal Form, Growth and Exit of West German Firms - Empirical Results for Manufacturing, Construction, Trade and Service Industries," CEPR Discussion Papers 1401, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1401
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    Cited by:

    1. Ichiro Iwasaki & Evzen Kocenda & Yoshisada Shida, 2020. "Distressed Acquisitions Evidence from European Emerging Markets," KIER Working Papers 1031, Kyoto University, Institute of Economic Research.
    2. Abdo Ahmad, Issam & Fakih, Ali, 2021. "Does the Legal Form Matter for Firm Performance in the MENA Region?," GLO Discussion Paper Series 801, Global Labor Organization (GLO).
    3. José Mata & Pedro Portugal, 2000. "Closure and divestiture by foreign entrants: the impact of entry and post‐entry strategies," Strategic Management Journal, Wiley Blackwell, vol. 21(5), pages 549-562, May.
    4. Stuart Fraser & David Storey & Julian Frankish & Richard Roberts, 2002. "The Relationship between Training and Small Business Performance: An Analysis of the Barclays Bank Small Firms Training Loans Scheme," Environment and Planning C, , vol. 20(2), pages 211-233, April.
    5. Holtz-Eakin Douglas & Rosen Harvey S, 2005. "Cash Constraints and Business Start-Ups: Deutschmarks Versus Dollars," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-28, February.
    6. Domínguez Jurado, José Miguel & Triguero-Ruiz, Francisco & Avila-Cano, Antonio, 2021. "Firm growth in the 21st century: Does the Andalusian economy comply with Gibrat’s Law?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 577(C).
    7. Mehmet Civelek & Ibrahim Dursun & Ashiqur Rahman, "undated". "How Perceptions of Bank Financing Constraints Differ Among Characteristics of SMEs: Evidence from Turkey," Review of Socio - Economic Perspectives 201818, Reviewsep.
    8. Jaka Cepec & Peter Grajzl, 2021. "Management turnover, ownership change, and post-bankruptcy failure of small businesses," Small Business Economics, Springer, vol. 57(1), pages 555-581, June.
    9. Byeongyong Paul Choi, 2010. "The U.S. Property and Liability Insurance Industry: Firm Growth, Size, and Age," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 13(2), pages 207-224, September.
    10. Kotorri Mrika & Krasniqi Besnik A., 2018. "Managerial Characteristics and Export Performance – Empirical Evidence from Kosovo," South East European Journal of Economics and Business, Sciendo, vol. 13(2), pages 32-48, December.
    11. Bozhidar Hadzhiev & Valentina Nikolova-Alexieva & Iva T. Bachvarova, 2018. "Creating the Conditions for Broadband Business Entrepreneurship to Ensure Lasting Success for the Bulgarian Society," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 92-105.

    More about this item

    Keywords

    Employment Growth; Exit; Insolvency; Limited Liability; Liquidation;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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