Determinants of business failure: The role of firm size

Abstract

This study uses quarterly time series data for the period 1964:I–1991:III to determine the effects of several factors on the aggregate business failure rate in the United States. The theoretical basis used is a dynamic profit maximization model. The empirical specification is a double-log functional form. A new approach to the incorporation of firm size into the analysis of business failure is adopted. Viewing business failure as a consequence of negative profits, the estimates support the managerial utility maximization theory. Moreover the findings show that new business formation has a negative effect on the failure rate while the same variable lagged by twelve quarters captures the timing of failure with a positive coefficient.