Duration of new firms: The role of startup financial conditions, industry and aggregate factors

This paper documents the relative importance of firm, industry and aggregate factors on the post-entry performance of new firms. This study utilizes a unique administrative dataset, T2LEAP, which contains employment and balance sheet information for all incorporated Canadian firms. The data allow us to include financial variables such as the debt-to-asset ratio (leverage) and document their impact on firm survival. We perform duration analysis on all the entrant manufacturing firms during the period 1985–1996. In addition to leverage, we find that: firm characteristics such as size and labour productivity; industry conditions, such as the real exchange rate, the difference in the US–Canada tariff rates, entry penetration, and the capital–labour ratio; and aggregate conditions in terms of the yield gap also play a role in the survival prospects of new firms.

► We investigate the survival patterns of new firms. ► Use a rich administrative tax dataset T2LEAP. ► T2LEAP contains observable measures of firm financial condition or debt-to-asset ratio (leverage). ► Our duration analysis focuses on the 1985–1996 entrant cohorts. ► Find that firm-specific effects matter along with industry and aggregate factors.