Failure is an Option: Failure Barriers and New Firm Performance
Stanford University - Management Science & Engineering; Santa Clara University - Department of Management
Charles E. Eesley
Kathleen M. Eisenhardt
Stanford University - Management Science & Engineering
July 18, 2013
Rock Center for Corporate Governance at Stanford University Working Paper No. 111
Do bankruptcy law changes in the institutional environment affect the rate of founding by particular types of entrepreneurs and the performance of their ventures? We take advantage of a quasi-natural experiment in Japan where changes to bankruptcy laws reduced the consequences of closing a firm. We define elite entrepreneurs as those from the top ten universities in Japan and older individuals and find that: a) the proportion of firms declaring bankruptcy increases, especially for firms founded by elite entrepreneurs, b) elite entrepreneurs form an increasing proportion of new firm foundings, and c) new firms performance increases as these elite entrepreneurs are more likely to found higher performing firms. While prior research emphasizes the lowering of entry barriers, our work suggests that reducing the “barriers to failure” can stimulate venture formation among elite individuals leading to higher performing firms. 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: 40
Keywords: entrepreneurship, institutions, Japan
JEL Classification: M13, O53, D21, D78, D92, H32working papers series
Date posted: January 10, 2012 ; Last revised: October 25, 2013
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