Derivation of hypotheses
The reasons why entrepreneurs close their business are many and diverse. Closures may
be the result of economic pressures, such as insolvency or bankruptcy, or strategic rea-
sons, such as an effort to avoid bankruptcy or absolve guarantee claims. In most cases
closures are not economically inevitable. Entrepreneurs often close businesses ‘voluntar-
ily’ in order to return to the workforce, enter retirement, make a clean break and open a
different business, or due to health reasons, etc. Yet regardless of the ultimate cause of
closure, its occurrence can be emotionally burdening for the entrepreneur (Sheperd,
2003). Once ‘discouraged’ (Stokes and Blackburn, 2001), entrepreneurs may conclude
they are not up to the task of self-employment, as they ‘learn’ about their own inabilities
(Jovanovic, 1982). This depresses the profit expectations of further self-employment and
may prevent restart if profit expectations are negative, i.e., below that expected from an
alternative mode of employment. This scenario is particularly likely in the case of busi-
ness failure, when entrepreneurs are more inclined to become pessimistic about future
attempts (McGrath, 1999). While discouraged entrepreneurs may have a lowered willing-
ness to start afresh, the feasibility of establishing a new business may also be restricted.
Metzger (2008) analyzed the occurrence of real restarts considering particularly the ef-
fect of how a previous business was abandoned. Failed entrepreneurs i.e. entrepreneurs
who closed a cash-strapped firm voluntarily or went bankrupt are less likely to restart
than other experienced entrepreneurs who closed a firm. However, if entrepreneurs
chose unlimited liability legal forms, capital constraints can lower the restart probability
additionally. Business failure due to bankruptcy is likely to impede restart owing to the
financial affliction by remaining debts and financing problems resulting from the failure.
However, if the legal form of the former business stands for capital protection due to lim-
ited liability the type of failure does not matter that much. The findings of Metzger
(2008) give an idea about how financial afflictions resulting from abandoning a business
affect the restart likelihood since the occurrence of start-up financing problems depends
on the type of business closure (Metzger, 2007a). He shows that particularly previous
bankruptcy increases the likelihood to be faced with start-up financing problems. Conse-
quently, both the existence of and the access to financial means seem to be restricted in
case of previous business failure.
However, since the data applied in Metzger (2008) does not allow a disentanglement be-
tween willingness and feasibility he cannot differ between effects resulting from negative
expectancies and capital restrictions. Information about the occurrence of real financial
losses resulting from business closure can help to separate these effects. Financial losses
arising from business closure can impact various stakeholders: shareholders, banks and
public institutions, or suppliers and other stakeholders. It is reasonable to expect that
financial losses impact the likelihood of a restart as a function of the stakeholders who
have been forced to bear losses. Four out of five start-ups capitalize on entrepreneurs’
own capital, one out of five start-ups applies banks loans and further 20 percent utilizes
money from family and friends (Metzger, 2007a). There is thus a high probability that
entrepreneurs themselves are financially affected by losses incurred from business clo-
sure, which, as a consequence, reduces personal wealth, the fundament of future ac-
tions.