Award-Winning Paper “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 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 those over 40 years of age and find that: a) likelihood of bankruptcy increases, especially for firms founded by elite entrepreneurs, b) elite entrepreneurs form an increasing proportion of the new firms, and c) new firm 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.

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(Bob Eberhart, an advisor to BDTI, was awarded a Best 2012 Paper Proceedingsprize by the Academy of Management, a Best 2012 Paper award from the Ecole l'ehess au Japon du Franc, and a Best Conference Paperfrom the famous Kaufmann Foundation at its Liverpool conference with respect to this paper.)

Paper by:

Robert N. Eberhart
Research Scholar
Department of Management Science and Engineering
Stanford University

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

Kathleen M. Eisenhardt
Stanford Warren Ascherman M.D. Professor
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.

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