Failure Is an Option: Institutional Change, Entrepreneurial Risk and New Firm Growth

39 Pages Posted: 10 Jan 2012 Last revised: 5 Dec 2016

Robert Eberhart

Santa Clara University - Department of Management

Charles E. Eesley

Stanford University - Management Science & Engineering

Kathleen M. Eisenhardt

Stanford University - Management Science & Engineering

Date Written: October 20, 2016

Abstract

Does an institutional change that eases exit via bankruptcy reform enhance venture growth? We take advantage of a quasi-natural experiment in Japan to examine this question. Using longitudinal data over a 10-year period, we find that bankruptcy reform not only increases the rates of bankruptcy and founding, but more importantly improves the likelihood of high growth ventures. This institutional change disproportionately encourages elite individuals (i.e., those with superior human and social capital) to start firms. In turn, these individuals are more likely to launch high growth ventures. Broadly, we contribute at the nexus of institutional theory and entrepreneurship by placing elite entrepreneurs and venture growth in the spotlight, and by highlighting how an institutional change that eases exit fosters a regenerative cycle of exit, founding and growth by attracting more capable entrepreneurs. Overall, we conclude that lowering barriers to exit via lenient bankruptcy laws encourages superior – and not just more – entrepreneurs to start firms.

Keywords: entrepreneurship, institutions, Japan

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

Suggested Citation

Eberhart, Robert and Eesley, Charles E. and Eisenhardt, Kathleen M., Failure Is an Option: Institutional Change, Entrepreneurial Risk and New Firm Growth (October 20, 2016). Organization Science, 2016, Forthcoming; Rock Center for Corporate Governance at Stanford University Working Paper No. 111. Available at SSRN: https://ssrn.com/abstract=1982819 or http://dx.doi.org/10.2139/ssrn.1982819

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

Charles E. Eesley

Stanford University - Management Science & Engineering ( 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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