Failure is an Option: Failure Barriers and New Firm Performance

(Abstract) – Do bankruptcy changes in the institutional environment affect the rate of founding by particular types of founders and the performance of their ventures?

We take advantage of a natural experiment in Japan where during the last decade Japan implemented legal reforms to revive Japan’s economic fortunes by changes to bankruptcy laws that reduced the consequences of closing a firm. We argue that lowered costs of exit may have attracted individuals with greater human capital and social networks thus positively affecting new firm performance. We argue and test whether making it easier to fail will attract more founders and higher human capital founders resulting in improved firm performance. Our findings are: a) as expected the bankruptcy rate increases but at a higher rate for high human capital individuals, b) the rate of startup firms increases for older and elite educated entrepreneurs, and c) these groups of entrepreneurs are more likely to found higher performing firms. Overall, while prior research emphasizes the lowering of entry barriers, our work shows that reducing the costs of failure can also stimulate venture formation among certain groups, and lead to forming higher performing firms.

http://bdti.mastertree.jp/f/akn63c74

Working paper by

Robert N. Eberhart
SPRIE Researcher
Stanford University

Charles Eesley
Assistant Professor, Morgenthaler Faculty Fellow
Department of Management Science and Engineering
Stanford University

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.