Business Failures,Managerial Competence,and Macroeconomic Variables

Identifying the causes of business failures is crucial for effective policy making, and is especially important for small businesses which account for the largest component of firm failures in the U.S. As an example, if we find that managerial skills are important in reducing firm failures, resources can be directed toward management training and education programs. Policies designed to reduce failures would not only reduce the hardships on the individuals affected directly by such failures but would also aid in the smooth functioning of the economy.

There are two important factors which jointly determine the failure rate of businesses in the economy. The first is internal — the effectiveness of management, and the second is external — the general economic environment. Overall the purpose of this paper is to use the traditional economic model of the firm to discuss the importance of each of these factors in determining business failures and to use time-series data to assess the relative weight of each factor in determining failures over time. Specifically the objectives of this paper are: first, to economically define managerial competency; second, to test the hypothesis that managerial efficiency has increased over time; and third, to assess the effect of selected macroeconomic variables on firm failures.