Post-Entry Selection Among Newly Founded Firms in East and West Germany after Unification: A Competing Risk Model with Forced Bankruptcy Liquidations and Voluntary Liquidations

This paper provides an investigation of the post-entry selection among newly founded firms either via voluntary liquidation or via forced bankruptcy liquidation for the period since the unification of East and West Germany in 1990. The exit decision of newly founded firms is discussed in the context of the self-selection mechanism among entrepreneurs and the coexistent external selection mechanism implemented by the insolvency law. The estimation of semi-parametric competing risk models is based on panel data samples for the period from 1990 to 1997, which were drawn from a credit rating database. The samples cover together about 20,000 firm foundations between 1990 and 1994 in all East and West German regions and in all industries in the manufacturing, construction, trade and service sectors. The type-specific baseline hazard function estimates indicate that selection via bankruptcy liquidation starts as the first wave of voluntary liquidations already tapers off. Selection among firms founded during the period of economic transition in East Germany is delayed compared to the selection in West Germany. Further empirical results support the claimed relevance of owner-specific liquidation thresholds in addition to venture return-driven effects and the expected impacts of the German insolvency law on liquidation decisions.