Online Resources
John Armour & Douglas J. Cumming, Bankruptcy Law and Entrepreneurship, 10 Am. L. & Econ. Rev. 2 (2008).
http://www.cbr.cam.ac.uk/pdf/WP300.pdf
Abstract: The researchers investigate the link between bankruptcy and entrepreneurship using data on self employment over 16 years (1990-2005) and 15 countries in Europe and North America. They compile new indices reflecting how `forgiving' personal bankruptcy laws are, reflecting the time to discharge. These measures vary over time and across the countries studied. They show that bankruptcy law has a statistically and economically significant effect on self employment rates when controlling for GDP growth, MSCI stock returns, and a variety of other legal and economic factors. The results have clear implications for policymakers.
Timothy M. Bates & Alfred R. Nucci, An Analysis of Small Business Size and Rate of Discontinuance, 27 J. Small Bus. Mgmt. 1 (1989).
http://ideas.repec.org/p/cen/wpaper/90-2.html
Abstract: This study investigates small business failure rates in relation to several measures of firm size. Utilizing the Characteristics of Business Owners (CBO) data base, a nationwide sample of firms is utilized that is representative of the small business universe. One subset--small business employers--is shown to have relatively low rates of failure, while another group--very small firms with no employees--exhibits relatively high rates of business discontinuance. The finding that the probability of firm failure is strongly (inversely) related to firm size is shown to hold up as well when the age of the business is controlled for.
Jim E. Everett & John Watson, Small Business Failure Rates: Choice of Definition and Industry Effects, 17 Int’l Small Bus. J. 33 (1999).
http://isb.sagepub.com/cgi/reprint/17/2/31
Abstract (from publisher): Results from previous studies examining the incidence of small business failure have reported significant variations in failure rates between industry sectors. Indeed, the results from some studies are in direct conflict. For example, Lowe, McKenna and Tibbits (1991) reported that the manufacturing sector had the highest failure rate while Bruderi, Preisendorfer (1992) and Phillips and Kirchoff (1989) found that the manufacturing sector had the highest survival rate. The significant variations in reported failure rates and the apparent conflict between the findings of some studies must surely be a source of some confusion for policy- makers and others with an interest in the small business sector. The results of this study suggest that reported failure rates may depend heavily on the definition of failure adopted. A better understanding of the effect that choice of failure definition may have on reported failure rates should lead to improved policy decisions by governments, financial institutions and other groups with interest in small business.
Brian Headd, Redefining Business Success: Distinguishing between Closure and Failure, 21 Small Bus. Econ. 51-61 (2003).
www.sbaonline.sba.gov/advo/stats/bh_sbe03.pdf
Abstract (from author): New firms are believed to have high closure rates and these closures are believed to be failures, but two U.S. Census Bureau data sources illustrate that these assumptions may not be justified. The Business Information Tracking Series (BITS) showed that about half of new employer firms survive beyond four years and the Characteristics of Business Owners (CBO) showed that about a third of closed businesses were successful at closure. The CBO also made it possible to compare results of models of business survival and business success, but because of non-response bias logit models were used. Similar to previous studies, firms having more resources – that were larger, with better financing and having employees – were found to have better chances of survival. Factors that were characteristic of closure – such as having no startup capital and having a relatively young owner – were also common in businesses considered successful at closure. Hence, few defining factors can be isolated leading to true failures. The significant proportion of businesses that closed while successful calls into question the use of “business closure” as a meaningful measure of business outcome. It appears that many owners may have executed a planned exit strategy, closed a business without excess debt, sold a viable business, or retired from the work force. It is also worth noting that such inborn factors as race and gender played negligible roles in determining survivability and success at closure.
Seung-Hyun Lee, Yasuhiro Yamakawa, & Mike W. Peng, An Empirical Examination of 'Barrier to Exit': How Does an Entrepreneur-Friendly Bankruptcy Law Affect Entrepreneurship Development at a Societal Level?Babson College Entrepreneurship Research Conference (BCERC) 2007; Frontiers of Entrepreneurship Research 2007.
http://www.sba.gov/advo/research/rs326tot.pdf
Abstract: Does an entrepreneur-friendly bankruptcy law encourage more entrepreneurship development at a societal level? How does bankruptcy law affect entrepreneurship development around the world? Drawing on a real options perspective, we argue that if bankrupt entrepreneurs are excessively punished for failure, they may pass potentially high-return but inherently high-risk opportunities. Amassing a longitudinal, cross-country data base from 35 countries spanning ten years, we find that a lenient, entrepreneur-friendly bankruptcy law encourages entrepreneurs to take risks and thus let entrepreneurship prosper. Components of an entrepreneur-friendly bankruptcy law are: (1) the availability of a reorganization bankruptcy option, (2) the time spent on bankruptcy procedure, (3) the cost of bankruptcy procedure, (4) the opportunity to have a fresh start in liquidation bankruptcy, (5) the opportunity to have an automatic stay of assets, (6) the opportunity for managers to remain on the job after filing for bankruptcy, and (7) the protection of creditors at the time of bankruptcy.
Aparna Mathur, A Spatial Model of the Impact of Bankruptcy Exemptions on Entrepreneurship (2005).
http://www.sba.gov/advo/research/rs261tot.pdf
Abstract (from author): This is the first paper that highlights the role of spatial interactions, in the context of state bankruptcy laws, in the entrepreneurship decision. The focus of the paper is on small businesses. Small and medium enterprises represent between 96 percent to 99 percent of all enterprises in the US. This paper asks whether laws that facilitate easy exit are an important consideration in entry of small businesses. The study uses U.S. data, since the U.S. has sufficient variation in bankruptcy law across states. This paper studies the decision of an individual to begin (or end) a business in a particular state, as a function of bankruptcy regulations and other macroeconomic and business variables in that state as well as those in neighboring states. I use spatial econometric techniques to model these interactions. The study uses longitudinal data from the SIPP dataset. Model estimation is computationally challenging due to the large number of observations and the presence of a lagged endogenous variable, individual random effects, and state dummies. The paper finds that higher bankruptcy exemptions in neighboring states lower the probability of starting a business in the state of residence. The bankruptcy exemption in one’s own state has a significant and positive impact on entrepreneurship.
Aparna Mathur, Beyond Bankruptcy: Does the Bankruptcy Code Provide a Fresh Start to Entrepreneurs? (2011), available athttp://www.sba.gov/sites/default/files/Bankruptcy%20Report_0.pdf.
Abstract (adapted from the Executive Summary): This paper assesses the extent to which the U.S. bankruptcy system is effective in providing small businesses a “fresh start” after a bankruptcy filing. The author uses data from the 1993, 1998 and 2003 National Survey of Small Business Finances to explore how firms fare after a bankruptcy filing. The results suggest some areas of concern though there are clearly promising aspects as well…. To summarize, while the bankruptcy code does help certain businesses get back on their feet, the persistence of credit access issues after bankruptcy suggests that the promise of the “fresh start” has not been fully realized.
Teresa A. Sullivan, Elizabeth Warren & Jay Lawrence Westbrook, Financial Difficulties of Small Businesses and Reasons for Their Failure, Nat’l Tech. Info. Serv. (1999).
www.sbaonline.sba.gov/advo/research/rs188.pdf