Why Companies Fail: Insights from Canadian Businesses

An interesting new study on corporate failures has been released by Stats Canada.

It says that younger companies are more likely to go bankrupt because of shortcomings in managerial knowledge and financial management abilities. In contrast, older firms are more likely to fail because of an inability to adapt to environmental change.

These are the conclusions of a new research paper that examines factors underlying corporate bankruptcies, and compares the main causes of failure between young and old firms.

While age is strongly correlated with probability of survival or failure, the underlying process at work differs over time. The study found that, after controlling for size and industry membership, bankruptcy among younger firms is attributable to different causes than failure among older firms. Firms lacking internal competencies are more likely to fail at a young age. Firms facing a hostile environment are more likely to fail when they are older.

Young firms fail if their initial endowment of assets is exhausted before they are able to develop value-creating strategic assets. This occurs when resources and capabilities are not mobilized effectively, in step with the requirements of strategic success factors. Young firms may have knowledge of the industry, but suffer from a lack of valuable resources and capabilities.

In contrast, older firms may have established resources and capabilities, but their value will decline if they do not meet the demands of the competitive environment

Download the study here.