Financial Capital Structure and Small Business Viability

Abstract

This study reports small business discontinuance rates for large nationwide samples of firms that were operating in 1982. Firms still in business in late 1986 were disproportionately the larger scale operations: a strong inverse relationship exists between firm size and likelihood of discontinuance. Econometric models are estimated that seek to differentiate traits of owners whose firms are still operating in late 1986 from those whose businesses had discontinued. Explanatory variables used to differentiate surviving firms from discontinuances include qualitative and quantitative measures of owner human capital, demographic traits, and owner financial capital inputs at the point of business startup. Higher business discontinuance rates are particularly pronounced among firms formed with small amounts of financial capital by owners whose educational backgrounds are weak. The high failure rates that are often assumed to typify younger small businesses were not observed among firms that were well endowed with owner financial capital and human capital inputs.