THE IMPACT OF INITIAL FINANCIAL STATE ON FIRM DURATION ACROSS ENTRY COHORTS

Authors


  • *The assistance and hospitality of Statistics Canada, Business and Labour Market Analysis department is gratefully acknowledged. We are indebted to Garnett Picot and Michael Wolfson for their support and encouragement. Leonard Landry and Steve Romer provided superb assistance on computing issues. We are grateful for comments and suggestions from Jason Allen, Andrew Bernard, Jeff Campbell, John Earle, Steve Ferris, John Haltiwanger, Rick Harbaugh, Vien Huynh-Lee, Boyan Jovanovic, Lynda Khalaf, Nick Kiefer, Ricardo Lopez, Alex Maynard, Toshihiko Mukoyama, Gregor Smith, Pravin Trivedi, and participants of Alberta, Carleton, Indiana, Lakehead, Purdue, Ryerson, Simon Fraser, Statistics Canada, Syracuse, Wilfred Laurier, Winnipeg, the DIME workshop at the Scuola Superiore Sant'Anna, and the 2009 International Industrial Organization Conference. We also wish to thank Keith Head for supplying the tariff data. We thank Susan Brunet of the Federal Research Data Centre for vetting the contents of this paper subject to the disclosure rules set forth by Statistics Canada. The authors acknowledge funding from the Social Science and Humanities Research Council of Canada grant 410-2007-2048. All errors are the responsibility of the authors.

Abstract

Recent theories of industry dynamics emphasize the role of financial frictions in determining post entry performance of firms. Testing these theories has been difficult because of the lack of financial data on small, young and private firms. Using a unique data set, T2LEAP, this paper considers the survival of new firms in Canadian manufacturing from a financial perspective. Duration analysis quantifies the effects of firm, industry and aggregate factors. Findings show that nonlinear effects are found with firm leverage. Finally, likelihood decompositions offer insights into the contributing factors to firm hazard for nine entry cohorts during the period 1985–1997.

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