Earlier reporting misconducts by serial entrepreneurs as predictors of misconduct‐triggered forced firm closures

Abstract

This paper investigates the factors determining the forced closures of firms, which occur when entrepreneurs fail to submit annual reports for their businesses. Drawing on various theoretical perspectives, including a novel focus on the past reporting misconducts of the same entrepreneurs, the study sheds light on this phenomenon. Analysis of Estonian micro‐firms run by serial entrepreneurs reveals that recent reporting misconducts, particularly those of a severe nature, significantly determine a firm's forced closure. Additionally, factors such as firm size, age, and certain aspects of corporate governance play significant roles in this regard. In turn, the financial performance of a firm largely fails to signal future forced closure, potentially indicating that when entrepreneurs submit annual reports showing normal performance, they might be hiding bad performance. The paper also delineates different types of violators based on the severity of their past misconducts, noting that a particular type characterized by a large number of severe violations is especially prone to forced closures. Finally, the paper develops high‐accuracy prediction models for forced closures, identifying the number of most severe violations and firm size as the most important variables.