In Discussion Paper No. 1401, Research Associate Dietmar Harhoff, Michael Woywode and Research Fellow Konrad Stahl discuss determinants of firm survival and growth in Germany within its pre-1989 boundaries. They argue that in theory, the legal form adopted by a firm is an important indicator of the riskiness of projects undertaken. Firms operating under limited liability should be characterized by rates of insolvency and employment growth which are above average. These theoretical predictions are tested by considering the survival chances and employment growth rates of various types of enterprises in a sample of approximately 11,000 West German firms from all major sectors of the German economy. The analysis distinguishes between voluntary liquidation without losses to creditors and bankruptcy as forced liquidation.

The authors demonstrate that firms under limited liability are indeed characterized by higher employment growth and higher insolvency rates than are comparable firms under full liability. The likelihood of insolvencies is a non-monotonic function of firm size, while the likelihood of voluntary liquidation decreases monotonically. Firms whose owners are approaching retirement age face relatively high risks of voluntary liquidation while the propensity to insolvency is not affected by the owner's age. The basic empirical results hold in pooled samples as well as in estimates at the level of the one-digit industries of manufacturing, construction, trade, and services.

Legal Form, Growth and Exit of West German Firms – Empirical Results for Manufacturing, Construction, Trade and Service Industries
Dietmar Harhoff, Konrad Stahl and Michael Woywode