Firm age dynamics and causes of corporate bankruptcy: age dependent explanations for business failure

Abstract

Theories of organizational failure predict that reasons for corporate demise may differ by firm age and life cycle stage. However, large-scale empirical studies that investigate the relationship between firm characteristics and specific causes of failure are scarce. This study therefore aims to shed light on firm mortality and firm age by analyzing a unique data set of bankrupt small and medium-sized enterprises. Separate statistical models for individual causes of failure are developed in which the liabilities of age are abstracted and disentangled from liabilities of size and industry specific variables on firm level. In this regard organizational ecology argumentation is integrated with resource-based view reasoning following the call for multi-theoretic approaches in organizational failure research. Results show that different failure causes dominate at specific stages of organizational life as defined by age quartiles. While young and adolescent firms predominantly fail due to internal shortcomings, mature small and medium-sized enterprises struggle more with increased competition and economic slowdowns.