Survival of the Fittest? Entrepreneurial Human Capital and the Persistence of Underperforming Firms

Abstract

The model developed here explains why some firms survive while other firms with equal economic performance do not. We argue that organizational survival is not strictly a function of economic performance but also depends on a firm's own threshold of performance. We apply this threshold model to the study of new venture survival, in which the threshold is determined by the entrepreneur's human capital characteristics, such as alternative employment opportunities, psychic income from entrepreneurship, and cost of switching to other occupations. Using a sample of 1,547 entrepreneurs of new businesses in the U.S., we find strong support for the model, The findings suggest that firms with low thresholds may choose to continue or survive despite comparatively low performance.