Business Failures: Liabilities of Newness, Adolescence, and Smallness

Abstract

The contextual factors of a company, particularly age and size, are commonly argued to have important implications on its survival chances. The research presented in this paper explores these implications in the context of the construction industry by analyzing the age distribution of failed construction companies and computing age-specific failure probabilities over a 10-year period (1985–1994). The research findings support the liability of adolescence rather than the liability of newness concept. Computed age-specific failure probabilities reveal a pattern of failure in the U.S. construction industry where the risk of failure increases initially with increasing age, reaches a peak point and decreases thereafter as companies grow older. Youngness of a construction company, which implies lack of organizational learning and lack of legitimacy, coupled with smallness, appears to be the main factor explaining this pattern. The paper finally addresses the strategic implications of increasing turbulence in the construction industry on the survival or failure of construction firms.