Joseph B. Farhat

A RESOURCE-BASED VIEW OF NEW FIRM SURVIVAL: NEW PERSPECTIVES ON THE ROLE OF INDUSTRY AND EXIT ROUTE

This article explores factors affecting the survival and exit routes of new firms created in 2004 using data from the Kauffman Firm Survey. We draw upon the Resource-Based View to test several hypotheses regarding the impact of both tangible and intangible resources on new firm survival in both service and non-service firms. We also distinguish between two types of exit: closures (permanently stopped operations) and mergers or acquisitions. Our results reveal that, although service and non-service firms may differ in terms of industry structure, the fundamental resources that contribute to their survival are the same: education, work and life experience and adequate levels of startup financial capital. In spite of these similarities, our results did reveal industry differences in terms of exit. We found serial entrepreneurs in the service sector were more likely to exit through merger or acquisition. Conversely, intellectual property decreased the likelihood of exit through merger or acquisition for non-service firms. Thus, our findings revealed a link between human capital, industry and exit route for this sample of new firms.

The Leasing Decisions of Startup Firms

Small business owners use a variety of bootstrap financing methods to acquire the needed resources necessary to survive and eventually grow their businesses. One such method is to lease equipment and/or machinery. Leasing is a viable alternative to bank financing and for small businesses, leasing is a flexible strategy to preserve cash. In this study, we analyze the impact of asset specificity and growth opportunities on leasing decisions of a large cohort of startup businesses. To test our hypotheses, we use a unique dataset provided by the Kauffman Foundation.1 Our longitudinal analyses show that startups with unique/specific assets have a lower propensity to lease whereas startups with high growth opportunities are more likely to lease their assets. We also argue that the owners’ demographic and socioeconomic characteristics are likely to impact their individual risk-taking behavior. Thus, factors such as owners’ experience, education, age, gender, and race are likely to impact the decision to lease assets. Our results show that owners’ characteristics do have a significant impact on these decisions. The findings reveal that female and older entrepreneurs as well as highly educated owners are less likely to lease. Our work advances prior research on the determinants of leasing in large, publicly traded firms and provides additional insights on entrepreneurial bootstrapping.

Do Women Lag Behind Men? A Matched-Sample Analysis of the Dynamics of Gender Gaps

Existing research suggests that female-owned firms are not as successful as those owned by men. However, there is a distinct possibility that the performance measures employed in these studies have failed to control for the level of heterogeneity that may be inherent in the firms that were assessed during these studies. This study employed a matched sample approach to determine whether gaps in success, such as survival rate, outcomes, growth, and financial capital injection, between male- and female-owned businesses are eradicated when heterogeneity is controlled for within the models employed. We matched 430 female-owned business with male-owned equivalents that had the same human capital profile in terms of age, level of education, experience, and race; the same working preferences in terms of factors such as number of hours worked per week and whether the business was run from home or an office; and the same industry in terms of high-tech, medium-tech and non-tech. We found that female-owned firms have the same rate of survival as their male-owned counterparts and that the growth rate exhibited by female-owned businesses in terms of factors such as total assets, employment, profit, and sales, is the equivalent of male-owned firms. We did not detect any gender gaps in terms of business performance. Furthermore, the results indicated that, while the firms that are started by women start smaller and stay smaller, they do not lag behind those started by males in terms of business performance. The findings of this research hold particular interest for scholars, researchers, policy makers, investors, and financiers. Above all else, they should offer women who are considering commencing their own venture some confidence that they have the same chance of succeeding as their male counterparts.

Becoming M&A Targets: Evidence from Small, Privately Held Firms

We analyze a private firm’s likelihood of exiting through a merger or acquisition. To test our hypotheses we use the confidential version of the Kauffman Firm Survey data, the largest longitudinal dataset of newly formed businesses in the United States. Our results show that firms with R&D activity and those characterized by lower information asymmetry are more likely to become M&A targets. We also show that having intellectual property rights such as copyrights, patents and trademarks does not significantly affect the firm’s likelihood to exit through M&A. These results suggest that acquirers value the growth potential signaled through R&D rather than the existing intellectual property and therefore, firms with high quality innovations are the most attractive targets for acquisitions. The hypothesis that venture-backed firms are more likely to become M&A targets finds strong support in our analysis. Angels or venture capitalists have the first opportunity to liquidate some or all their equity holdings when the firm becomes an acquisition target. Our results also show that firms owned by serial entrepreneurs are more likely to become M&A targets. From an acquirer’s perspective, entrepreneurs with start-up experience are typically favored due to their proven ability to realize the growth potential of a venture as well as their willingness and ability to harvest value for themselves and their investors.

Using Weights in the Analysis of the KFS Data: KFS Professional Development Workshops

Although researchers using a complex sample survey data need not understand the in-depth details of the process generating the survey weights, questions about why, when, and how to use weighting and which statistical packages to use are the most common during data analysis. Unfortunately, relatively little practical information is available about why, when, and how to use weights, which makes weighting a challenging subject in the analysis of the KFS data. As noted by Kish (1992), one cannot find textbooks or references that provide a reasonable and comprehensive explanation of the use of weights in complex sample data. Although the theory of design-based inference from probability sample design has been under development for the last hundred years and is still an evolving field, the question to weight or not to weight in driving statistical models is an ongoing debate; however, the consensus among design-based analysts is that using weights in the statistical analysis of complex sample survey is never a wrong thing to do. This paper is aimed at clarifying the complex design of the KFS, thereby providing a simple guide to weighting and introducing the statistical procedures by the major statistical packages that are designed for analyzing data derived from a complex sample survey.

Market Efficiency in Emerging Markets: Does the Legal System Matter?

This paper investigates the question of market efficiency in a sample of thirty-four emerging markets with different legal systems. We use both dollar and local currency returns to examine whether exchange rate effects can improve our understanding of the information flows in these capital markets. Using various tests, we find that market efficiency rate is higher for dollar denominated returns than for local currency returns. Contrary to our predictions, we find weak evidence that one country’s legal system contributes to the level of market efficiency. At the minimum, we can state that for local currency returns, civil law countries seem to have markets that are more efficient compared to those in common law countries. Overall, the findings are consistent with the suggestion that exchange rate reforms as well as exchange rate fluctuations may introduce biases that can affect market efficiency.

Testing Trade-Off and Pecking Order Models Under Different Institutional Environments

In this paper, we examine the differences in information asymmetry and financing patterns and a generalized version of the trade-off theory across countries with different institutional environments. We find that firms in Civil law countries have higher information asymmetry, rely more on internally generated funds, and use more short-term debt to finance their financing deficit, relative to those in Common law countries. In both Civil law and Common law countries, factors suggested by the trade-off theory explain the financing deficit coefficient in the generalized version of the trade-off model. Overall, the generalized version of the trade-off theory provides a better explanation for the changes in capital structure relative to the pecking order theory, even in countries with higher information asymmetry.