Analyses of Business Dissolution by Demographic Category of

Business Ownership

by Dr. Richard J. Boden, Jr.

2001. [30] pages. The University of Toledo,

Toledo, Ohio 43606-3390,

under contract no. SBA-HQ-00-M-0497

This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of research papers prepared under contracts

issued by the U.S. Small Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do

not necessarily reflect official policies of the SBA or other agencies of the U.S. government. For more information, write to the Office of

Advocacy at 409 Third Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

Purpose

This study combines data on all nonfarm businesses

with demographic information about owners of businesses in order to examine how the survival

prospects of businesses vary by demographic group,

industry, and other characteristics. The project concentrates on the survival rate through 1996 of firms

started in 1992 but also shows how the core database, the Business Information Tracking Series

(BITS) microdata file, can be combined with other

databases to answer a wide variety of questions.

For illustrative purposes, the report shows the survival rates for all businesses and for four demographic

subgroups in all industries and two major industry

groups: business services and eating and drinking

places. The highest five survival rates by major industry

group are shown for each of the demographic groups.

In addition, the study uses proportional hazard models to calculate the risks of business dissolution relative to a control group for each demographic group.

Thus, the report serves both to begin to answer

frequently asked questions about survival rates (overall, by industry, and by demographic group) and to

demonstrate the feasibility of combining the BITS

with other databases for research purposes.

Scope and Methodology

The study combines records from the BITS and the

Census Bureau’s 1992 Survey of Minority-Owned

Business Enterprises and Women-Owned Businesses

(SMOBE/WOB). The BITS is a database containing

longitudinal data (specifically, annual data from 1989

through 1996 at the time the research was conducted)

on virtually all nonfarm U.S. business establishments

with paid employees. Establishments that are part of

multi-location firms are linked to the firm. For each

establishment, variables in the BITS include: employment (and firm employment if different), standard

industrial classification (SIC) code, geographic identification codes, payroll, and start year. The BITS

was created and is updated annually by the Census

Bureau with funding from the Office of Advocacy.

The SMOBE and WOB are cross-sectional data

series produced every five years as part of the Census

Bureau's economic censuses. The 1992 SMOBE/WOB

universe consists of sole proprietorships, partnerships,

and S corporations, but not C corporations. These

data series contain information on business owners’

demographic characteristics: in 1992, race, ethnicity,

and gender of the “majority” of each firm's owners

was sought through a mail survey. The SMOBE/WOB

also contain data on several firm characteristics,

including industry, geographic location, employment,

payroll, and receipts. The two files also contain

weights that permit calculation of population estimates by demographic category of ownership.

Previously, Alicia Robb had matched SMOBE/WOB

records that had employer identification numbers (EINs)

to the BITS when she worked for the Office of

Advocacy in 2000. About 3.1 million of the 17 million

firms represented by the weighted SMOBE/WOB
files reported payrolls in 1992, meaning they were

employer businesses like those in the BITS file; the

remainder were sole owners without employees.

This research uses 44,707 unweighted matched

SMOBE/WOB-BITS records of firms started in 1992

to find the probability that the firm survived through

1996. Owners were placed in one of four demographic groups: white non-Hispanic, black (Hispanic

or not), white Hispanic, or Asian and other (Pacific

Islander, American Indian, or Alaskan Native,

Hispanic or not). Census rules governing disclosure

limited publication of survival rates to the five “twodigit SIC code” industries with the highest survival

rates for each demographic group, and to the survival

rates for each demographic group for two very widespread industries, business services and eating and

drinking places. In addition, regression-like proportional hazard models were specified and estimated to

yield insight into the impact (all else being equal) of

certain business, industry, and geographic characteristics on businesses’ risk of dissolution over the

1992-1996 time period.

Highlights

• For businesses that first had payroll in 1992, the

following table shows the percentages that survived

at least to 1996.

Demographic Group All Eating and Business

of Majority of Owners Firms Drinking Places Services

White Non-Hispanic 49 46 48

Black 35 36 19

White Hispanic 45 41 49

Asian and Other 50 47 60

All 47 45 44

• The highest survival rates by two-digit SIC code

for each demographic group were: white nonHispanic, 82 percent for oil and gas extraction;

black, 79 percent for legal services; white Hispanic,

66 percent for health services; Asian and other, 76

percent for health services.

• The proportional hazard modeling allows testing of

a variety of hypotheses about factors affecting the

risk of dissolution (firm closure) for firms started in

1992 by examining the hazard ratio—the likelihood

of dissolution relative to a control group. For

instance, relative to white non-Hispanic–owned

firms, black-owned firms were 29 percent more

likely to close by 1996; the hazard ratios for other

groups relative to white non-Hispanics were not

statistically significant. In contrast, relative to firms

owned by white non-Hispanic women, firms owned

by black women were 16 percent less likely to

close by 1996. Again, the hazard ratios for other

groups were not statistically significant.

• Other hazard ratios are computed relative to a reference group within each demographic group. The

differences in relative hazards can be striking. For

instance, compared to firms in agricultural services

and mining (the reference group), construction firms

had higher (and statistically significant) risks of closure in the full sample and in three of the four demographic groups. (The hazard ratio was not statistically significant for white Hispanic owners in any

industry group.) The risk of closure for black-owned

construction firms was less than 10 percent higher than

for the black-owned reference group, whereas for Asian

and other construction firms, the risk was nearly

double that of the Asian and other reference group.

Conclusions

The BITS data have already proven to be a valuable

resource for empirical analyses of business, establishment, and employment dynamics. The matched

data open up even more dimensions for prospective

empirical analyses by augmenting the BITS file with

information on the racial/ethnic and gender classification of firms’ ownership. Beyond the uses in this

study, the matched file can also be used to assess

business employment change for various demographic classifications of business ownership.

Ordering Information

The full text of this report is online at www.sba.gov/advo/

research/rs204tot.pdf. Summaries of other studies performed under contract to the U.S. Small Business

Administration’s Office of Advocacy are available on

the Internet at www.sba.gov/advo/research.

Printed copies are available for purchase from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

Tel. (800) 553-6847

TDD: (703) 487-4639

Order number: PB 2001-104043

Price codes: pending

The National Technical Information Service’s

complete data base of federally funded business

research is available on the Internet at www.ntis.gov.