Improving Business Failure Prediction for New Firms: Benchmarking Financial Models with Human and Social Capital

Erik Wilhelm Wetter · Karl J. Wennberg

32 citations0/0 files storedThe Journal of Private Equity

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Financial Distress and Bankruptcy Prediction Entrepreneurship Studies and Influences Private Equity and Venture Capital

Abstract

Abstract Business failure prediction is a prominent issue in research and practice. However, the relation between financial performance and firm default in new firms is more complex than previously assumed and both finance researchers and practitioners can benefit from the existing research on entrepreneurship and new firm performance. Developing measures for human and social capital grounded in previous research, we find that either of these variables have considerably higher predictive power than the standard financial model in predicting which firms stay in business and which firms that default. With regards to new firms in high-technology and service industries, the traditional financial model does not beat the predictive accuracy of simply flipping a coin. TOPICS:Private equity, analysis of individual factors/risk premia, statistical methods, developed

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2003The role of social and human capital among nascent entrepreneurs 2000Prior Knowledge and the Discovery of Entrepreneurial Opportunities 1993Human Capital 1994Initial human and financial capital as predictors of new venture performance 1997Survival of the Fittest? Entrepreneurial Human Capital and the Persistence of Underperforming Firms 2001Intangibles: Management, Measurement, and Reporting 1991Predictors and financial outcomes of corporate entrepreneurship: An exploratory study 2006Organizations Evolving

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