Reconceptualizing Entrepreneurial Exit

Entrepreneurial Exit

Karl WennbergStockholm School of Economics

Johan WiklundSyracuse University

Dawn R. DeTienneColorado State University

Melissa S. CardonPace University

Exit: Confusing evidence to date?Exit: Confusing evidence to date?

Predictors of Exit + 0 -Income /earnings in S-E

Holtz-Eakin etal.(1994)Gimeno et al (1997)Jørgensen (2005)Andersson (2006)

Education

Andersson (2006)Taylor (1999) Lin et al. (2000)Meager & Bates (2004)

Cowlings et al (1997)Johansson (2000)Robert & Bukodi (2004)Yu & Su (2004)Gerber (2004)Lohmann & Luber (2004)Burke et al (2005)

Bates (1990)Brüderl et al., (1992)Nziramasanga & Lee (2001)Amossé & Goux (2004)Sørensen (2007)

Industry experience

Metzinger (2007) Shane & Stuart (2002) Wicker & King (1989)Carter et al (1997)Gimeno et al (1997)Brüderl & Preisendörfer (1998)Pennings et al. (1998)Taylor (1999)Bates & Servon (2000)Van Praag (2003)Bosma et al. (2004)Ciavarella et al (2004)

Management experienceBates (1990) Gimeno et al (1997)

Entrepreneurial experience

Jørgensen (2005)Wennberg (2007)

Van Praag (2003)Gimeno et al (1997)

Carter et al., (1997)Taylor (1999)Lin et al. (2000)Andersson (2006)

Age

Bates (1990)Taylor (1999)Holtz-Eakin et.al.(1994)

Johansson (2000) Bates (1999) Gimeno et al (1997)Lin et al. (2000)Van Praag (2003)Arum & Muller (2004)

Entrepreneurial Exit

Entrepreneurial Exit

Problems in Prior ResearchProblems in Prior Research

1. Theoretical frameworks?1. Theoretical frameworks?- Expected Utility (EU) – most empirical work- Sociology – disconnect between theories of class vs. theories of network/homphily-Psychology (e.g. Prospect theory, Theory of Planned Behavior) -high internal validity but reliance on experiments

3. Role of economic performance?3. Role of economic performance? - Low correlation performance – exit- “Irrational” entreprenuerial career choices (Hamilton, 2000)- Entrepreneurs as “skewness lowers” (Åsterbro, 2003) or “Hubris” (Griffith et al. 2006)

2.2. Underspecification problemUnderspecification problem- Need to distinguish different exit choices/routes from each other

This paperThis paper

Empirical approach:Empirical approach:

1.Expected Utility (EU) vs. Prospect theory (PT)-PT higher internal validity but sometimes difficult to distinguish from EU-Relative explanatory power of EU / PT vary with domain and demographics (e.g. Harrison & Ruthström, 2007)

2. Underspecification problem:-Need to distinguish the different choice sets from each other (i.e. by specification tests or computing marginal effects/competing models)

3. Performance designed away (incorporated in outcome variable)

DefinitionDefinitionEntrepreneurial Exit: Whenever individuals exit the firm they started

Theretical/Conceptual frameworkTheretical/Conceptual framework

We view entrepreneurial exit as liquidation of a financial investment.(individual heterogeneity in intended longevity, emotional attachment ,etc.).

Entrepreneurial Exit

Matched individual-firm data:

Owner-managed firms in high-tech and knowledge-intensive services

1,735 new ventures followed for eight years (full population – no sample)

Career history of owners: Human capital, demographics, class background

Firm data: age, size, industry controls, performance measures allows us to differentiate three exit routes: Dissolution, harvest sale, and distress sale(first research to prove distinctiveness of various sales routes (Storey, Parker & Van Wittelstoltjin, 2005)

Multinomial logit model with marginal effects of individual-level predictors

Hypotheses tested by binary logit models testing each outcome against alternatives

Entrepreneurial Exit

MethodsMethods

Hypotheses: Entrepreneurial ExperienceHypotheses: Entrepreneurial Experience

Dissolution Harvest Sale DistressSale

Continuation

Complementary Individual factors:* Entrepreneurial learning* Habitual entrepreneurship

Entrepreneurial Exit

Hypotheses: EducationHypotheses: Education

Dissolution Harvest Sale DistressSale

Continuation

Competing Individual factors:* Higher performance (Bates, 1990)

* More outside options (Gimeno et al., 1997)

Entrepreneurial Exit

Hypotheses: Industry ExperienceHypotheses: Industry Experience

Dissolution Harvest Sale DistressSale

Continuation

Competing Individual factors:Utility-maximizing arguments:* Experienceperformance (Cooper et al., 1994)

Entrepreneurial Exit

Behavioral arguments: inexperience positively related to overconfident entry (Delmar & Shane, 2004; Hayward, Shepherd, & Griffin, 2006) and unwillingess to dissolve unsuccessful exploration (Lowe & Ziedonis, 2006)

Hypotheses: AgeHypotheses: Age

Dissolution Harvest Sale DistressSale

Continuation

Complementary Individual factors:* $1 today more valuable than $2 tomorrow* Value of discounted future cash flow decreases with age, relative to selling (Becker, 1965; Lévesque & Minniti, 2006)

Entrepreneurial Exit

ResultsResults

Entrepreneurial Exit

Specification tests:

1. Akike / Bayesian information criterion (AIC/ BIC) lowest value for the trinomial exit specification Dissolution, Harvest sale, andDistress sale

2. Independence of irrelevant alternatives (IIA)test was insignificant prior work with exit as a binary outcome has pooled conceptually as well as mathematically distinct events.

Competing Cramer-Ridder tests rejected pooling the 3 alternatives

-Valid model, but what about the appropriateness of utility theory and prospect theory to explain the different exit routes?

Results : Entrepreneurial ExperienceResults : Entrepreneurial Experience-fully supported!-fully supported!

Dissolution Harvest Sale DistressSale

Continuation

Entrepreneurial Exit

1.86%

1.81%

4.72%

Dissolution Harvest Sale DistressSale

Continuation

Entrepreneurial Exit

1.38% 0.61%

Results : EducationResults : Education-not supported.-not supported.

Results : Industry ExperienceResults : Industry Experience-mixed supported!-mixed supported!

Dissolution Harvest Sale DistressSale

Continuation

Entrepreneurial Exit

2.05% 3.10%

1.37%

Results : AgeResults : Age-fully supported!-fully supported!

Dissolution Harvest Sale DistressSale

Continuation

Entrepreneurial Exit

1.93%

1.29%

1.37%

1.40%

Conclusions and future research:Conclusions and future research:

Entrepreneurial Exit

Monday 14:30!

- Research on exit needs theoretical frameworkthat motivates distinct exit routes and what leads entrepreneurs to seek (or end up in) one or the other

- Relative explanatory power of EU / PT vary between demographics, hence both are valuable for studies of entrepreneurial exit (e.g. Harrison & Ruthström, 2007)

- Prior research has tended to treat exit as an underspecified event – e.g. Entrepreneurial Experience

Further research --Failure-reducing strategies:

-Income substitution :decreases probability of dissolution and distress sale, but no effect on the harvest sale

-Reinvestment: Decrease all types of exit

Related research:

-Emotional investment exit decision (Shepherd, Wiklund & Haynie, 2008)

-Team decision exit decision (Hellerstedt, Aldrich, Wiklund, )