Moving forward: Balancing the financial and emotional costs of business failure☆

https://doi.org/10.1016/j.jbusvent.2007.10.002Get rights and content

Abstract

Why do owner-managers delay business failure when it is financially costly to do so? In this paper we acknowledge that delaying business failure can be financially costly to the owner-manager and the more costly the delay, the more difficult the recovery. But we complement this financial perspective by introducing the notion of anticipatory grief as a mechanism for reducing the level of grief triggered by the failure event, which reduces the emotional costs of business failure. We propose that under some circumstances delaying business failure can help balance the financial and emotional costs of business failure to enhance an owner-manager's overall recovery — some persistence may be beneficial to recovery and promote subsequent entrepreneurial action.

Section snippets

Executive summary

A puzzling question has been that of why owner-managers delay business failure when it is financially costly to do so? Business failure occurs when a decline in revenues and/or increase in expenses are of such magnitude that the firm becomes insolvent, and is unable to attract new debt or equity funding. Consequently, the business cannot continue to operate under the current ownership and management. Delaying business failure likely diminishes the owner-manager's salvageable personal equity,

Traditional economic model of persistence

Economic theories applied as descriptive models of firm behavior suggest that the decision of the firms' managers and owners to persist or exit the market is based upon firm performance (Alchian, 1950, Friedman, 1953, Williamson, 1991). For example, Ansic and Pugh (1999) build upon the econometric modeling technique of Krugman (1989), and employ an expected present value approach to propose that the firm will persist only until the point that current losses exceed the present value of expected

Escalation of commitment and persistence

The escalation of commitment framework offers a possible explanation for why owner-managers may delay business failure and persist with an underperforming business. Escalation of commitment refers to an increasing commitment to the same course of action in a sequence of decisions resulting in negative outcomes (Karlsson et al., 2005a, Karlsson et al., 2005b: 835; Staw et al., 1997). Our review of the escalation of commitment literature (see also Karlsson et al., 2005a, Karlsson et al., 2005b)

Anticipatory grieving and emotional recovery: an additional explanation for why owner-managers delay business failure

Psychological research on bereavement has demonstrated that the level of grief over the death of a loved one depends on the period of emotional processing in anticipation of the upcoming death.4 That is, the extent to which individuals experience anticipatory grief (before the loss event) will influence the level of grief (after the loss actually occurs), and importantly its corresponding emotional

Delaying business failure to balance the financial and emotional costs of failure

Our anticipatory grief explanation for delaying business failure to persist with a business introduces the need to “balance” the owner-manager's financial and emotional costs to optimize his or her recovery. This “balance” likely varies across individuals and across business failures within individuals. Earlier we made the case that owner-managers' personal wealth is likely substantially diminished by the failure of their businesses. However, some owner-managers may have much of their personal

Discussion

Why owner-managers delay business failure when it is financially costly to do so? The dominant explanation in the literature is simply that the decision to delay business failure is biased — these entrepreneurs are wrong. We offer a different explanation, or at least offer the possibility that some of these owner-managers are operating in their own best interests. Specifically, we focused on the owner-managers' recovery from business failure to once again own and manage a business, thus

Conclusion

In this paper we proposed that emotions are more than simply a factor that bias owner-managers such that they delay business failure to their own peril. Emotions occur before and after the failure event and impact the emotional recovery of an owner-manager. That is, a period of grieving that anticipates business failure can decrease the level of grief triggered by the failure event and thus enhance emotional recovery. Recovery is a function (negative) of both the financial and emotional costs

References (109)

  • MacMillanI.C. et al.

    Criteria used by venture capitalist to evaluate new venture proposals

    Journal of Business Venturing

    (1985)
  • MajorB. et al.

    Coping with stigma through psychological disengagement

  • MilgramN.A. et al.

    The procrastination of everyday life

    Journal of Research in Personality

    (1988)
  • RerupC.

    Learning from past experience: Footnotes on mindfulness and habitual entrepreneurship

    Scandinavian Journal of Management

    (2005)
  • ShepherdD.A. et al.

    New venture survival: ignorance, external shocks, and risk reduction strategies

    Journal of Business Venturing

    (2000)
  • Van DijkE. et al.

    Buying and selling exchange goods: loss aversion and the endowment effect

    Journal of Economic Psychology

    (1996)
  • AlchianA.

    Uncertainty, evolution and economic theory

    Journal of Political Economy

    (1950)
  • AltmanE.

    Financial ratios, discriminant analysis and the prediction of corporate bankruptcy

    Journal of Finance

    (1968)
  • AnsicD. et al.

    An experimental test of trade hysteresis: market exit and entry decisions in the presence of sunk losses and exchange rate uncertainty

    Applied Economics

    (1999)
  • ArcherJ.

    The Nature of Grief: The Evolution and Psychology of Reactions to Loss

    (1999)
  • BeaulieuP.R.

    Commercial lenders' use of accounting information in interaction with source credibility

    Contemporary Accounting Research

    (1994)
  • BelkR.W.

    Possessions and the extended self

    Journal of Consumer Research

    (1988)
  • BenightC.C. et al.

    Social cognitive theory of traumatic recovery: the role of perceived self-efficacy

    Behaviour Research and Therapy

    (2003)
  • BenightC. et al.

    Bereavement coping self-efficacy in cancer widows

    Death Studies

    (2001)
  • BonannoG.A. et al.

    Facial expression of emotion and the course of conjugal bereavement

    Journal of Abnormal Psychology

    (1997)
  • BowerG.H.

    How might emotions affect learning?

  • BrocknerJ.

    The escalation of commitment to a failing course of action: toward theoretical progress

    Academy of Management Review

    (1992)
  • BrophyD.J. et al.

    A finance perspective on entrepreneurship research

    Entrepreneurship: Theory and Practice

    (1992)
  • ButlerL.D. et al.

    Anticipating loss and other temporal stressors predict traumatic stress symptoms among partners of metastatic/recurrent breast cancer patients

    Psycho-Oncology

    (2005)
  • CavesR. et al.

    Barriers to exit

  • ChristophersonL.K.

    Cardiac transplant: preparation for dying or for living

    Health and Social Work

    (1976)
  • CorbettA.C.

    Experiential learning within the process of opportunity identification and exploitation

    Entrepreneurship: Theory and Practice

    (2005)
  • CuisnerM. et al.

    Pregnancy following miscarriage: curse of grief and some determining factors

    Journal of Psychometric Obstetrics and Gynecology

    (1996)
  • CyertR.M. et al.

    A Behavioral Theory of the Firm

    (1963)
  • DavidssonP. et al.

    The role of social and human capital among nascent owner-managers

    Journal of Business Venturing

    (2003)
  • DeanT.J. et al.

    Impediments to imitation and rates of new firm failure

  • DowningS.

    The social construction of entrepreneurship: narrative and dramatic processes in the coproduction of organizations and identities

    Entrepreneurship: Theory and Practice

    (2005)
  • FriedmanM.

    Essays in Positive Economics

    (1953)
  • GarlandH. et al.

    Do-escalation of commitment in oil exploration: when sunk losses and negative feedback coincide

    Journal of Applied Psychology

    (1990)
  • GimenoJ. et al.

    Survival of the fittest? Owner-managerial human capital and the persistence of underperforming firms

    Administrative Science Quarterly

    (1997)
  • GolemanD.

    Emotional Intelligence

    (1995)
  • HaywardM.L.A. et al.

    A hubris theory of entrepreneurship

    Management Science

    (2006)
  • HoganN.S. et al.

    Development and validation of the Hogan Grief Reaction Checklist

    Death Studies

    (2001)
  • HuyQ.N.

    Emotional capability, emotional intelligence, and radical change

    Academy of Management Review

    (1999)
  • JacobsS. et al.

    Diagnostic criteria for traumatic grief

    Death Studies

    (2000)
  • KarakayaF.

    Market exit and barriers to exit: theory and practice

    Psychology and Marketing

    (2000)
  • KarlssonN. et al.

    A conceptualization of task dimensions affecting escalation of commitment

    European Journal of Cognitive Psychology

    (2005)
  • KarlssonN. et al.

    Escalation of commitment with transparent future outcomes

    Experimental Psychology

    (2005)
  • KeilM. et al.

    Why software projects escalate: an empirical analysis and test of four theoretical models

    MIS Quarterly

    (2000)
  • KrugmanP.

    Differences in income elasticities and trends in real exchange rates

    European Economic Review

    (1989)

    • Cited by (328)

    • Failure Escape: The role of advice seeking in CEOs’ awareness of financial difficulties and corporate restructuring

      2024, Journal of Business Research

    • Nurturing innovation through intelligent failure: The art of failing on purpose

      2024, Technovation

    • Leaving the family business: The dynamics of psychological ownership

      2023, Journal of Family Business Strategy

    • Religion and Entrepreneurial Exits: Divine Attributions and Eternal Time-frames

      2024, Journal of Management, Spirituality and Religion

    • The promise of entrepreneurship ecosystems: a conceptual model for black American entrepreneurs

      2024, Journal of Research in Marketing and Entrepreneurship

    • Does vicarious entrepreneurial failure induce or discourage one's entrepreneurial intent? A mediated model of entrepreneurial self-efficacy and identity aspiration

      2024, International Journal of Entrepreneurial Behaviour and Research
    View all citing articles on Scopus
    ☆

    The authors would like to thank Ethel Brundin, Venkat, and two anonymous reviewers for providing valuable comments on an earlier version of the paper.

    1

    Tel.: +46 36 15 77 00; fax: +46 36 16 10 69.

    2

    Tel.: +315 443 3392.

    View full text
    Published by Elsevier Inc.