Abstract

http://ssrn.com/abstract=1982819
 
 

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Failure is an Option: Failure Barriers and New Firm Performance


Robert Eberhart


Santa Clara University - Department of Management; Stanford University - Management Science & Engineering

Charles E. Eesley


Stanford University

Kathleen M. Eisenhardt


Stanford University - Management Science & Engineering

July 1, 2014

Rock Center for Corporate Governance at Stanford University Working Paper No. 111

Abstract:     
This study investigates the affect on new venture performance after a regulatory change that motivated the entry of more elite founders because bankruptcy consequences were moderated. Prior research on policy efforts to stimulate entrepreneurship has focused on the motivations and resources available at the beginning of a venture. While this literature has focused on formation rates, the forces that lead to the founding of successful ventures remain elusive. Our study, in contrast, tries to uncover the forces that would motivate the formation of more successful venture by motivating elite founders to start venture. We develop a concept of “failure barriers”, the lowering of which can stimulate venture formation among high human and social capital individuals because they are more affected by bankruptcy consequences since they have more at risk and have better alternative opportunities. To test our theory, we take advantage of a natural experiment in Japan where changes to bankruptcy laws reduced the consequences of closing a firm. We find that: a) high human and social capital entrepreneurs form an increasing proportion of the new firms, b) new firm performance increases as these high human and social capital entrepreneurs are more likely to found higher performing firms, and c) that new firm performance variability increases. While prior research emphasizes the lowering of entry barriers, and that lenient bankruptcy laws are detrimental to new firm performance, our work suggests that reducing the consequences of bankruptcy affects new firms performance through its heterogeneous effect on potential entrants depending on their status. Overall, we find that legal reforms that reduce failure barriers encourage “better”, not just “more”, entrepreneurs to found ventures.

Number of Pages in PDF File: 36

Keywords: entrepreneurship, institutions, Japan

JEL Classification: M13, O53, D21, D78, D92, H32

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Date posted: January 10, 2012 ; Last revised: September 23, 2014

Suggested Citation

Eberhart, Robert and Eesley, Charles E. and Eisenhardt, Kathleen M., Failure is an Option: Failure Barriers and New Firm Performance (July 1, 2014). Rock Center for Corporate Governance at Stanford University Working Paper No. 111. Available at SSRN: http://ssrn.com/abstract=1982819 or http://dx.doi.org/10.2139/ssrn.1982819

Contact Information

Robert Eberhart (Contact Author)
Santa Clara University - Department of Management ( email )
500 El Camino Real
Santa Clara, CA California 95053
United States
408-554-4574 (Phone)
HOME PAGE: http://www.scu.edu/business/management/faculty/eberhart.cfm
Stanford University - Management Science & Engineering ( email )
473 Via Ortega
Stanford, CA 94305-9025
United States
Charles E. Eesley
Stanford University ( email )
473 Via Ortega
Stanford, CA 94305-9025
United States
(740) 236-4653 (Phone)
HOME PAGE: http://www.stanford.edu/~cee
Kathleen M. Eisenhardt
Stanford University - Management Science & Engineering ( email )
473 Via Ortega
Stanford, CA 94305-9025
United States
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