- Susan Coleman (University of Hartford)*
- Carmen Cotei (University of Hartford)*
- Joseph Farhat (Central Connecticut State University)
We examine new firms created in 2004 and track their business status in the following four years. For firms that exited the sample during the 2004-2008 period, we distinguish between voluntary firm closure in the form of merger or acquisition and compulsory firm closure in the form of failure/permanently closed operations. We apply duration analysis with competing risks using non-parametric, parametric and semi-parametric analyses to test the effect of owner, business and industry characteristics on firm survival, closure and exit through M&A.
Our findings reveal that, consistent with prior research, surviving firms do, indeed, exhibit different characteristics from exiting firms. Moreover, firms exiting through mergers and acquisitions are more similar in their characteristics to surviving firms than they are to permanently closed firms. In this sense, a firm that exits through merger or acquisition might more appropriately be characterized as a successful rather than an unsuccessful closure. Thus, previous research which does not distinguish between successful and unsuccessful firm closures may actually underestimate the survival rate of new firms.
The rigor of our analytical methods provide compelling evidence for the impact of specific owner, firm, and industry characteristics. First, consistent with prior research, human capital in the form of education and experience matter. In our analyses, higher levels of education and prior work experience were significantly associated with firm survival. Higher levels of human capital may increase the firm owner’s ability to cope with the complexities and challenges associated with launching a new firm. Second, financial capital matters. Permanently closed firms had significantly higher levels of debt and higher credit risk than surviving firms. As noted in prior research, high levels of debt increase the risk of financial distress and bankruptcy. Finally, social capital matters. Our results reveal that firms located in the densely populated Northeast were more likely to survive than firms in other geographic regions, possibly due to the availability of networks and support services.
Our results also show that larger firms were significantly less likely to close than smaller firms. This suggests that firm size brings with it a certain amount of staying power. Diversified firms, or firms with both products and services, were also more likely to survive. From the perspective of organizational form, firms with unlimited liability were more likely to survive, suggesting that firm owners who are at personal risk may be more cautious in their strategies in order to avoid the risk of failure. Consistent with prior research, it appears that firms in the highly competitive retail industry are more prone to closure. We also find evidence that technology-intensive firms or those with high levels of R&D expenditures are more likely to close. In the realm of race, ethnicity, and gender, some of our models indicated that women-owned firms are more likely to close, while others indicate that firms owned by Blacks are more likely and those owned by Asians are less likely to close.
A major value added in this paper is in the distinction it makes between permanently closed firms and firms that exit through M&A. Our findings reveal that an exit through M&A is more likely to be indicative of firm success or opportunity rather than failure. Younger owners were more likely to exit through M&A than surviving firms. This suggests that younger owners may see an opportunity to "harvest value" which can then be reinvested in other ventures. We also found that franchises are significantly more likely to exit through M&A. Franchises benefit from a significant level of support from the parent company. In this sense they represent an attractive opportunity to new entrepreneurs. Finally, specific industries appear to be less attractive from an M&A perspective. These include firms in the Construction industries as well as those in Professional, Scientific, and Technical fields. Both of these industries have high barriers to entry, the first in the form of physical and financial capital, and the second in the form of human capital.
* Susan Coleman and Carmen Cotei would like to thank the Ewing Marion Kauffman Foundation for supporting the access to the confidential Kauffman Firm Survey data through NORC Data Enclave at the University of Chicago.