Organizational mortality: the liabilities of newness and adolescence

Administrative Science Quarterly,  Sept, 1990  by Josef Bruderl,  Rudolf Schussler

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Organizational Mortality: The Liabilities of Newness and Adolescence

This article contains a theoretical discussion and an empirical test of Stinchcombe's "liability of newness" hypothesis, which assumes higher risks of failure for young organizations compared with old ones. It is shown that this hypothesis is not a good representation of the mortality hazard of West German business organizations. Therefore, we introduce the concept of a "liability of adolescence," which proposes an inverted U-shaped risk pattern. It is shown that mortality, depending on the initial resource endowments of a firm, peaks between one and fifteen years after founding. From this perspective, extended interpretations of the liabilities of smallness and legal form are given. These arguments are well supported by a log-logistic rate model estimated with our data. Organizations die young; at least that is the widespread opinion among organizational theorists. Stinchcombe (1965: 148) has coined the term "liability of newness" for the comparatively higher death rates of new organizations relative to old ones. A number of recent empirical studies (e.g., Freeman, Carroll, and Hannan, 1983) confirm that organizational death risks decline monotonically with age. The present article challenges the liability of newness argument theoretically and empirically. Instead, a "liability of adolescence" is assumed. This new hypothesis distinguishes between two periods of an organizational life cycle. In an early phase, referred to as adolescence, death risks are low, because decision makers are monitoring performance, postponing judgment about success or failure. Meanwhile, organizations often live on a stock of initial resources. In a later phase, initial monitoring has ended and organizations are subject to the usual risks of failure. The central aim of this article is to test the two liabilities empirically through a study based on the complete set of business registrations and deregistrations in the area of Munich and Upper Bavaria (West Germany) from January 1980 to March 1989. With the generous help of Munich's Chamber of Commerce we obtained data for more than 171,000 firms. Most of them were quite small, and those that died, died soon enough to allow for an analysis of death processes, despite the relatively short observation period.

BACKGROUND

The Liability of Newness