Post-Entry Struggle for Life and Pre-Exit Shadow of Death from a Financial Perspective

35 Pages Posted: 11 Sep 2011

See all articles by Kim P. Huynh

Kim P. Huynh

Government of Canada - Bank of Canada; Indiana University Bloomington - Department of Economics

Robert J. Petrunia

Lakehead University - Department of Economics

Date Written: July 20, 2011

Abstract

The success or failure of small, young, and private firms depends highly on the evolution of their financial position. This paper considers the post-entry/pre-exit adjustment process of firms with focus on financial dynamics (debt-to-asset ratio). Empirically examining financial relationships has been difficult, due to a lack of data on the small, young, and private firms. With age, the post-entry struggle for life sees entrants become relatively larger and reduce their leverage, while their average growth rates fall. Further, entrants begin life more productive than the typical firm within an industry, but this disparity quickly reverses. Pre-exit dynamics see firm growth and relative firm size fall, while relative leverage and labour productivity rise. Increasing leverage hints at a shadow of death. Selection and survivor effects contribute to post-entry dynamics, while turnover and transition effects contribute to pre-exit dynamics.

Keywords: Post-entry/Pre-exit Firm Dynamics, Leverage Dynamics

JEL Classification: L11, L60

Suggested Citation

Huynh, Kim P. and Petrunia, Robert J., Post-Entry Struggle for Life and Pre-Exit Shadow of Death from a Financial Perspective (July 20, 2011). Midwest Finance Association 2012 Annual Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1890649 or http://dx.doi.org/10.2139/ssrn.1890649

Kim P. Huynh (Contact Author)

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

Robert J. Petrunia

Lakehead University - Department of Economics ( email )

Thunder Bay, P7B 5E1
Canada

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