Unpacking New Firm Exit

Abstract

AbstractThis paper unpacks new firm exit in a novel way. It theorizes that, even after controlling for a wide range of human capital and other factors, access to, and the management of, an overdraft facility powerfully influences the exit chances of a new firm. It then unpacks exits, distinguishing between new firms that exit leaving no debts (pure exiters) and those that exit leaving a debt (defaulters). A second distinction is between those exiting in the short‐ and the longer‐run. Using a bank‐based dataset, comprising nearly 6,000 new businesses in England and Wales tracked over a decade, it shows that, although there are similarities, financial management plays an important, but very different, role in explaining exit across the four groups. Overall, new firms with an overdraft have lower exit rates than those without, but the reverse is the case for defaulters. A second finding is that, although exceeding the terms of an overdraft enhances short‐run survival, it lowers survival in the longer‐run. These results highlight the powerful insights provided by private information held by the bank that is not normally available to academic researchers.