Firm’s Sudden Deaths

Alexander Saichev (), Yannick Malevergne and Didier Sornette ()
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Alexander Saichev: Nizhni Novgorod State University
Didier Sornette: EMLYON Business School – Cefra

Chapter Chapter 7 in Theory of Zipf's Law and Beyond, 2010, pp 97-122 from Springer

Abstract: Abstract There are a priori two exit mechanisms for firms: Firms disappear when their asset values become smaller than some minimum level. This is based on the standard idea, justified by the existence of a minimum efficient size, that there is a minimum firm size below which the firm cannot exist. This idea has been considered in several models of firm growth (see, e.g., de Wit, 2005 and references therein). An alternative approach suggested for instance by Gabaix (1999), considers that firms cannot decline below a minimum size and remain in business at this size until they start growing up again. In addition to the exit of a firm resulting from its value decreasing below a certain level, it sometimes happens that a firm encounters financial troubles while its asset value is still fairly high. One could cite the striking examples of Enron Corp. and Worldcom, whose market capitalization were supposedly high (actually the result of inflated total asset value of about $11 billion for Worldcom and probably much higher for Enron) when they went bankrupt. Beyond these anecdotic examples, there is a large empirical literature on firm entries and exits, that suggests the need for taking into account the existence of failure of large firms. For example, while it has been established that a first-order characterization for firm death involves lower failure rates for larger firms (Dunne et al., 1988, 1989), Bartelsman et al. (2003) also state that, for sufficiently old firms, there seems to be no difference in the firm failure rate across size categories. In previous chapters, we have examined the consequences and impact on Zipf’s law of the first exit mechanism. The present chapter is devoted to the study of the second mechanism.

Keywords: Sudden Death; Diffusion Equation; Hazard Rate; Survival Function; Balance Condition (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1007/978-3-642-02946-2_7

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