Post-Entry Struggle for Life and Pre-Exit Shadow of Death from a Financial Perspective
35 Pages Posted: 11 Sep 2011
Date Written: July 20, 2011
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: Suggested Citation