The age-effect of financial indicators as buffers against the liability of newness

Johan Wiklund, Ted Baker, Dean Shepherd

Research output: Contribution to journalArticle

108 Scopus citations

Abstract

This paper builds on the liabilities of newness literature to suggest that accounting information is important for new firms. Using a sample of over 30,000 companies followed during their first 7 years of existence, we find evidence that financial indicators mitigate the liability of newness and that this buffering effect is stronger the younger the organization. These results represent three primary contributions to the literature. First, our conceptualization of accounting measures as indicators of external (creditworthiness enhancing legitimacy) as well as internal (targets for management) buffers to the liabilities of newness provides a novel way of viewing these constructs and explains why they are important to new firms despite their uncertainty and opacity. Second, we theoretically justify and empirically validate that these constructs are more important the younger the new firm is, which runs counter to the common wisdom of these constructs in the entrepreneurship literature. Third, we identify buffers against failure for new firms that are generalizable across industries.

Original languageEnglish (US)
Pages (from-to)423-437
Number of pages15
JournalJournal of Business Venturing
Volume25
Issue number4
DOIs
StatePublished - Jul 1 2010

Keywords

  • Business failure
  • Financial indicators
  • Liabilities of newness

ASJC Scopus subject areas

  • Business and International Management
  • Management of Technology and Innovation

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