Post-Entry Struggle for Life and Pre-Exit Shadow of Death from a Financial Perspective

Abstract: The success or failure of small, young, and private firms depends highly on the evolution of their financial position. This paper considers the post-entry/pre-exit adjustment process of firms, with focus on financial (debt-to-asset ratio) and labor productivity dynamics. Empirically examining financial relationships has been difficult, due to a lack of data on small, young, and private firms. We find that the post-entry struggle for life results in highly productive entrants reducing their leverage. Pre-exit dynamics see firm growth and relative firm size fall, with rising leverage. Increasing leverage hints at a shadow of death. Selection and survivor effects contribute to post-entry dynamics, while turnover and transition effects contribute to pre-exit dynamics.