Firm dissolution in high-tech sectors: An analysis of closure and M&A
Introduction
A large body of empirical literature has explored the determinants of firm dissolution, focusing in particular on the effects of firm age and initial size (e.g., Dunne et al., 1988, Audretsch and Mahmood, 1995, Mata et al., 1995).
Stinchcombe (1965) first recognized that the likelihood of survival increases with firm age and theorized the liability of newness argument. More recent studies (e.g., Brüderl and Schussler, 1990, Fichman and Levinthal, 1991) have found that the highest risk of dissolution may not occur immediately after entry but may instead emerge some time later, thus indicating a liability of adolescence. At the same time, a liability of smallness has been documented: the smaller the initial size of a firm, the smaller its likelihood of survival, ceteris paribus.
To the best of our knowledge, very few empirical studies have separately analyzed the effects of age and initial size (for one exception, see Freeman et al., 1983) on closure and merger/acquisition (M&A). The latter are two distinct types of firm dissolution with different antecedents.
The arguments that the extant literature usually uses to explain the liabilities of newness (adolescence) and smallness are developed equating dissolution and closure, but they are unlikely to apply to M&A. Hence, the contribution of the present note to this literature stream is its investigation of the differential impact of age and initial size on closure and M&A.1 The note highlights and explains why the effects of these variables on the two diverse types of dissolution may be different.
In the empirical section, we focus on high-tech sectors. Separately analyzing the two dissolution types is especially worthwhile in these industries. Although closure is undoubtedly the most common dissolution type, the phenomenon of M&A is becoming more and more frequent in these industries. Indeed, M&A is more and more often used by large, established companies as part of their external technology sourcing strategies, with the aim of obtaining new technological artifacts and capabilities (e.g., Grandstrand and Sjölander, 1990).
Section snippets
Conceptual framework
Newness and smallness tend to increase firms' likelihood of closure. As the organizational ecology view (e.g., Freeman et al., 1983) claims, younger firms are more likely to fail because they lack experience, reputation, stable links with customers and suppliers, and a consolidated internal structure. However, the initial resource endowment may help firms to survive for some time, and entrepreneurs may be reluctant to close down their ventures “unless a sufficient amount of negative information
Methodology and data
We investigate firm dissolution in high-tech sectors using different empirical approaches. First, we explore the relationship between firm age and dissolution by computing the non-parametric Nelson–Aalen estimator of hazard rate functions. Then, we analyze the effect of initial size via the estimation of a semi-parametric Cox (1972) proportional hazard model and a log-logistic survival model. In particular, we investigate the impact on closure vs. M&A by estimating these models within a
Empirical results
Fig. 1 shows the estimated (smoothed) hazard rates for dissolution, closure, and M&A. Interestingly, the effect of age does not differ between the two dissolution types. Both hazard rates first increase over time and then, after a threshold corresponding to around nine years, begin to decrease. However, the reasons for this similar age dependence may differ. In cases of closure, Italian high-tech firms suffer from a liability of adolescence more than a liability of newness. Conversely, in cases
Conclusions
Our analyses reveal an inverted U-shaped relationship between age and the dissolution of Italian high-tech firms. However, the antecedents of such relationship differ between closure and M&A. With regard to the former, this liability of adolescence may be driven by the founding team's need to acquire enough information on the failure of the new business idea before deciding to exit. In contrast, the curvilinear effect on M&A suggests that some time must elapse before a new firm accumulates a
Acknowledgements
Financial support from UniCredit SPA is gratefully acknowledged. The authors are indebted to Massimo G. Colombo for useful comments and suggestions.
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