Failure Is an Option: Institutional Change, Entrepreneurial Risk, and New Firm Growth

Robert N. Eberhart (), Charles E. Eesley () and Kathleen M. Eisenhardt ()
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Robert N. Eberhart: Department of Management, Leavey Business School, Santa Clara University, Santa Clara, California 95053
Charles E. Eesley: Department of Management Science and Engineering, Stanford University, Stanford, California 94305
Kathleen M. Eisenhardt: Department of Management Science and Engineering, Stanford University, Stanford, California 94305

Organization Science, 2017, vol. 28, issue 1, 93-112

Abstract: Does an institutional change that lowers failure barriers improve new firm growth? We take advantage of a quasi-natural experiment in Japan that drastically reduced the stringency of bankruptcy regulations to examine this question. Using longitudinal data over a 10-year period, we find that bankruptcy reform increases the rates of bankruptcy and founding—and, more importantly, the likelihood of high-growth ventures—by disproportionately encouraging elite individuals (i.e., those with superior human and social capital) to start firms. In turn, these firms are more likely than others to achieve high growth. Broadly put, we contribute to research at the nexus of institutional theory and entrepreneurship by emphasizing the connectedness of barriers to failure, venture growth, and elite entrepreneurs. We also highlight how institutional change that eases bankruptcy change can foster a regenerative cycle of failure, founding, and growth by attracting more capable entrepreneurs. Overall, we conclude that lowering barriers to failure via lenient bankruptcy laws encourages more capable —and not just more —entrepreneurs to start firms.

Keywords: institutional theory; entrepreneurship; regulatory change; Japan; institutional change and entrepreneurship (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (48)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ororsc:v:28:y:2017:i:1:p:93-112

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