Small Business Failure Rates: Choice of Definition and the Size Effect

Abstract

Results of many previous studies on the rate of small business failure suggest an inverse relationship between size of business and propensity to fail. However, it has been sug­ gested that this inverse relationship, between firm size and the rate of discontinuance, may more accurately be characterized as an inverse relationship between age of busi­ ness and the rate of discontinuance. While some studies have confirmed the positive association between failure and age, they have generally found that a size effect persists even after controlUng for age. The central objective of this study is to show how reported failure rates may depend heavily on the definition of failure adopted, and to examine the proposition that the results of previous studies reporting a negative associ­ ation between propensity to fail and business size may have been driven by the choice of failure definition.