Our empirical analysis includes only bankrupt firms.
This restricted set of business exits excludes other types
of firm exits (e.g., merger) that are typically captured
in organizational ecology studies. However, bankruptcy
does capture failure in the extreme, differentiating it
from voluntary exit. Firms that are insolvent to the point
of legal proceedings have clearly failed to meet the
market's threshold of fulfilling their financial obligations.
Cochrane (1981) depicted failure as a series of
nested conditions. The most general definition is discontinuance.
Then, in increasing order of specificity and
decreasing order of subset size are failures as opportunity
costs, termination with losses or to avoid losses,
and, finally, bankruptcy. Performance thresholds are also
important to consider in the context of business failures.
Gimeno et al. (1997) established that a significant
factor in the continuance-discontinuance decision
for many entrepreneurs is their own acceptable threshold
of performance. Firms that appear to be underperformers
may persist if their thresholds are sufficiently low,
while other, relatively superior performers may exit if
their thresholds are sufficiently high.