Firm Closure, Financial Losses and the Consequences for an Entrepreneurial Restart

However, it is of twofold importance if banks suffer losses. First, losses at banks are
likely to be strong correlated with personal losses of the entrepreneurs reducing entre-
preneurs’ personal wealth. Second, losses at banks are “public” debts impeding the
chance of credit from other banks. Credit defaults are recorded by credit bureaus. This
worsens an entrepreneurs’ credit rating and, as a consequence, reduces the chance for a
credit approval. Even if the latter point might be less problematic in Germany, where
individuals and firms traditionally do not hop between banks, but rather cultivate a
strong relationship with one principal bank, a so-called Hausbank (house bank), losses at
banks can diminish entrepreneurs’ personal wealth and block banks as a source of financ-
ing, both are bad for restart feasibility.

On the basis of the discussed theoretical arguments and existing empirical evidence fol-
lowing hypotheses can be derived:

H1: Business closures which can be considered as failure lowers entre-
preneurs’ expectancy about future net profits of self-employment
and reduces restart likelihood.

H2: Financial losses resulting from business closure incurred by share-
holders constrain entrepreneurs’ financial leeway and reduce restart
likelihood more than losses at other stakeholders.

H3: Financial losses resulting from business closure incurred by banks
constrain entrepreneurs’ financial leeway and reduce restart likeli-
hood.

Data

In order to conduct the analysis the ZEW Entrepreneurship Study is applied. The data is
based on 12,000 observations that have been included in a telephone survey that was
carried out between March 1999 and March 2000 among German entrepreneurs who es-
tablished firms in the years 1990 until 1993. All of these firms operated in the manufac-
turing, construction, trade or selected service sectors and didn’t have the legal forms of
freelance, registered society or registered cooperative. Firms from the ZEW Foundation
Panel form the parent population for this survey. This panel is based on data provided by
Creditreform in semi-annual waves. Creditreform is the largest German credit rating bu-
reau with a comprehensive database of German firms at its disposal.

The survey collected information to the establishment of the interviewed entrepreneurs’
firms (e.g. legal status, founding year, and industry affiliation), a possible market exit
(e.g. exit year, reasons, and financial losses), a possible restart of any of the entrepre-
neurs involved in the closed firm (occurrence), and many other firm and entrepreneur
characteristics. The observed firms are all independent establishments, i.e. are no
branches of other firms. A detailed discussion of the survey is found in Almus et al.
(2001).

Concerning the approach used to obtain firm information, several attempts have been
made to contact an appropriate interview partner. A firm representative was tried to be
called on the basis of the last known firm contact details but (maximum two) firm partici-
pants including owners and managers were also tried to be called at their home ad-

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