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Moving forward: Balancing the

financial and emotional costs of a
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Johan Wiklund

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Journal of Business Venturing 24 (2009) 134 – 148

Moving forward: Balancing the financial and emotional

costs of business failure ☆
Dean A. Shepherd a,⁎, Johan Wiklund b,1 , J. Michael Haynie c,2
a
Kelley School of Business, Indiana University, 1309 East Tenth Street, Bloomington, IN 47405-1701, United States
b
Jönköping International Business School, P.O. Box 1026, SE-551 11 Jönköping, Sweden
c
Department of Entrepreneurship and Emerging Enterprises, Whitman School of Management, Syracuse University, 721 University Avenue,
Syracuse, New York, United States
Received 6 March 2007; received in revised form 14 September 2007; accepted 27 October 2007

Abstract

Why do owner-managers delay business failure when it is financially costly to do so? In this paper we acknowledge that
delaying business failure can be financially costly to the owner-manager and the more costly the delay, the more difficult the
recovery. But we complement this financial perspective by introducing the notion of anticipatory grief as a mechanism for reducing
the level of grief triggered by the failure event, which reduces the emotional costs of business failure. We propose that under some
circumstances delaying business failure can help balance the financial and emotional costs of business failure to enhance an owner-
manager's overall recovery — some persistence may be beneficial to recovery and promote subsequent entrepreneurial action.
Published by Elsevier Inc.

Keywords: Failure; Entrepreneur; Learning; Negative emotions; Commitment; Passion; Recovery

1. Executive summary

A puzzling question has been that of why owner-managers delay business failure when it is financially costly to do
so? Business failure occurs when a decline in revenues and/or increase in expenses are of such magnitude that the firm
becomes insolvent, and is unable to attract new debt or equity funding. Consequently, the business cannot continue to
operate under the current ownership and management. Delaying business failure likely diminishes the owner-
manager's salvageable personal equity, and may also require additional personal financial investments to delay
insolvency. A dominant explanation for this persistence with a failing business is that these owner-managers' decision
making is biased. In other words, these entrepreneurs are wrong. In this paper we offer a possible alternative

☆
The authors would like to thank Ethel Brundin, Venkat, and two anonymous reviewers for providing valuable comments on an earlier version of
the paper.
⁎ Corresponding author. Tel.: +812 856 5220.
E-mail addresses: shepherd@indiana.edu (D.A. Shepherd), johan.wiklund@jibs.hj.se (J. Wiklund), jmhaynie@syr.edu (J.M. Haynie).
1
Tel.: +46 36 15 77 00; fax: +46 36 16 10 69.
2
Tel.: +315 443 3392.

0883-9026/$ - see front matter. Published by Elsevier Inc.

doi:10.1016/j.jbusvent.2007.10.002
 D.A. Shepherd et al. / Journal of Business Venturing 24 (2009) 134–148 135

explanation, suggesting that some of these owner-managers are operating in their own best interests by delaying
business failure.
Specifically, we focus on the owner-managers' recovery from business failure to once again own and manage a
business. We acknowledge that delaying business failure can be financially costly to the owner-manager and that the
greater these cost, the more difficult the recovery. We complement this financial perspective by introducing the notion
of anticipatory grief as a mechanism for reducing the level of grief triggered by the failure event. We suggest that a
period of anticipatory grief reduces the emotional costs of business failure, and thus may enhance the emotional
dimension of an owner-manager's recovery. By conceiving recovery as negatively related to both the financial and
emotional costs of business failure, we propose that under some circumstances delaying business failure can help
balance the financial and emotional costs of failure to enhance an owner-manager's overall recovery. That is, some
persistence may be beneficial to recovery and promote subsequent entrepreneurial action.
We believe that our anticipatory grief perspective to delaying business failure has a number of important implications.
First, research on persistence has focused on the negative financial consequences of delaying the decision to exit from a
losing course of action. We complement this research by acknowledging that there are emotional as well as financial
consequences from business failure, that the ability to engage in subsequent entrepreneurial actions depends on emotional
as well as financial recovery, and that the decision to delay business failure may help “balance” financial and emotional
costs to optimize this recovery. Second, the procrastination and escalation of commitment literatures have focused on the
emotional causes but primarily negative financial consequences from persistence. We explore the emotional causes and
both the emotional and financial outcomes from delaying business failure. Third, a recent research has highlighted grief
over business failure as an obstacle to learning. We develop the notion of an owner-manager's anticipatory grief that occurs
before business failure and its relationship with the grief that is generated after the business failure event.

2. Introduction

There are few things more dreadful than dealing with a man who knows he is going under, in his own eyes, and in
the eyes of others. Nothing can help that man. What is left of that man flees from what is left of human attention.
–James Baldwin

Only those who dare to fail greatly can ever achieve greatly.
–Robert Kennedy

Business failure occurs when a fall in revenues and/or rise in expenses are of such magnitude that the firm
becomes insolvent and is unable to attract new debt or equity funding; consequently, it cannot continue to operate
under the current ownership and management (Shepherd et al., 2000). Business failure can be delayed by owner-
managers, but doing so likely diminishes the owner-manager's salvageable personal equity and may also require
additional personal financial investments to delay insolvency. For example, as losses mount the owner-manager
may need to sell some of the business assets to provide cash (including selling accounts receivable at a lesser value
[factoring]) to keep the business solvent. Because bank loans and equity investments are difficult to obtain as
businesses approach insolvency (Beaulieu 1994, 1996; Sinkey 1992), the owner-manager likely needs to invest
further personal financial resources to delay business failure. Such investments can be characterized as throwing
good money after bad. Yet, despite negative financial outcomes associated with delaying failure, research suggests
that owner-managers delay the decision to close a poorly performing business such that many underperforming
firms persist over an extended period of time (Gimeno et al., 1997; Karakaya, 2000; McGrath, 1999). To date, the
central focus of research on persistence has been on owner-managers' decision biases and their resulting negative
financial consequences (McGrath and Cardon, 1997; Meyer and Zucker, 1989; Van Witteloostuijn, 1998). But are
all owner-managers' decisions to delay business failure biased and causing themselves harm, or are there benefits
that can be generated through this form of persistence?
Owner-managers can be separated from their businesses, such that they may experience a business failure, yet
recover from that failure to be an owner-manager of a subsequent, successful business. Indeed, it is believed that we
learn more from our failures than our successes (McGrath, 1999; Sitkin, 1992), and after a business failure, owner-
managers have an opportunity to learn from the experience (Shepherd, 2003) to improve the odds of success for
subsequent entrepreneurial actions (Minniti and Bygrave, 2001). Entrepreneurs' subsequent business start-up, so called
136 D.A. Shepherd et al. / Journal of Business Venturing 24 (2009) 134–148

serial entrepreneurship, appears to be a common phenomenon (e.g., Ucbasaran et al., 2006) and an important
consideration for the understanding of entrepreneurship in general (MacMillan, 1986). Some of those who enter into
serial entrepreneurship have experienced failure in their previous entrepreneurial endeavors. When we consider
entrepreneurship as more than a one-business-shot for an individual, then the ability of entrepreneurs to recover from a
business failure provides valuable insights into the likelihood of serial entrepreneurship. This recovery from business
failure involves the owner-manager's financial resources, which are needed to fund necessary entrepreneurial activities
(e.g., starting-up or acquiring a business), and involves grief recovery (Shepherd, 2003), which “frees up” information
processing capacity (Mogg et al., 1990; Wells and Matthews, 1994), enhances learning from the experience (Bower,
1992), and restores the motivation to try again (Cuisner et al., 1996; Shuchter, 1986).
By acknowledging that entrepreneurship may involve repeated attempts at venture creation, we develop the notion
of an owner-manager's anticipatory grief to gain a deeper understanding of the recovery necessary for subsequent
entrepreneurial action. This opens up the possibility that some delay of business failure may be beneficial; persistence
can help to balance the financial and emotional outcomes of business failure to maximize the recovery of resources
(financial and emotional) necessary for subsequent entrepreneurial actions, such as founding another business.
Our framework provides four primary contributions. First, research on persistence has focused on the negative
financial consequences of delaying the decision to exit from a losing course of action (e.g., Keil et al., 2000; Ross and
Staw, 1986, 1993). By recognizing that owner-managers are not limited to one business, we complement these
“persistence” studies by acknowledging that there are emotional as well as financial consequences from business
failure, that the ability to engage in subsequent entrepreneurial actions such as founding another business depends on
emotional as well as financial recovery, and that the decision to delay business failure may help “balance” financial and
emotional costs to optimize this recovery. That is, some persistence may be beneficial to recovery.
Second, and related to the previous point, the procrastination and escalation of commitment literatures have focused
on the emotional causes and the negative financial effects of persistence. We offer a counter-weight to these
perspectives by investigating emotional causes, emotional outcomes, and the balance of financial and emotional costs
in optimizing recovery from business failure.
Third, previous studies have acknowledged heterogeneity in the level of grief generated by the loss of something
important (Bonanno and Keltner, 1997; Prigerson et al., 1996; Wortman and Silver, 1989, 1992) including business
failure (Shepherd, 2003). In this paper, we develop the notion of an owner-manager's anticipatory grief that occurs
before business failure and its relationship with the grief that is generated after the failure event — the period of
anticipatory grieving offers an explanation, in part, for owner-managers' levels of grief triggered by the business failure
event. Finally, we develop a model of business failure delay that can help explain why individuals are more or less
likely to make the transition from failure to subsequently owning and managing a business. This is an important
contribution to the growing literature on serial entrepreneurship.
In the next section, we provide a selective review of the dominant frameworks applied to the decision to persist
in the face of a losing course of action. We focus on two theoretical frames (escalation of commitment and
procrastination) that highlight the role of emotions in “biasing” individuals towards persistence and the negative
financial consequences of that bias. We then introduce the notion of anticipatory grief as a lens through which to
consider why it may be beneficial that some owner-managers persist by delaying business failure. Finally, we offer a
concluding discussion.

3. Delaying business failure: reasons for persistence

3.1. Traditional economic model of persistence

Economic theories applied as descriptive models of firm behavior suggest that the decision of the firms'
managers and owners to persist or exit the market is based upon firm performance (Alchian, 1950; Friedman, 1953;
Williamson, 1991). For example, Ansic and Pugh (1999) build upon the econometric modeling technique of
Krugman (1989), and employ an expected present value approach to propose that the firm will persist only until the
point that current losses exceed the present value of expected profits, because the top decision makers are
motivated by financial considerations. Drawn from this perspective are a number of key assumptions relevant to our
discussion. First, it is important to note that such theories assume that owner-managers are immediately aware of
the point in time when the firm becomes failing. Objectively, this assumption is supported by numerous bankruptcy
 D.A. Shepherd et al. / Journal of Business Venturing 24 (2009) 134–148 137

prediction models that provide performance thresholds that once breached, suggest that the business has passed the
point of no return and business failure is inevitable, or at least highly probable (Altman, 1968; Ohlson, 1980;
Zmijewski, 1984). Second, this traditional economic perspective assumes that once owner-managers realize their
businesses will fail, they should immediately take action to terminate the business. Immediately terminating a
failing business allows the owner-manager to salvage as much personal equity remaining in the business as
possible. Third, this perspective assumes that owner-managers are only motivated by financial considerations. This
leads to the following, rather obvious, proposition:
Proposition 1. The longer owner-managers persist by delaying business failure, the greater their financial costs
arising from its failure.
The resources of owner-managers are closely intertwined with those of their businesses. First, for many owner-
managers much of their personal resources are invested in their businesses and therefore much of their personal
wealth is tied to the value of that business (Brophy and Shulman, 1992). Second, although in theory a company
represents a separate legal entity providing limited liability for owner-managers, in practice banks and other lending
institutions often require personal guarantees from owner-managers before providing smaller and/or newer
businesses debt capital. In such a case personal collateral is equivalent to the entrepreneur investing their own
equity in the business because they are placing their personal funds at risk (Thorne 1989), and also being exposed to
personal losses if the business fails. Third, equity investors are highly influenced by the knowledge of the owner-
manager and often turn to an entrepreneur's track record for information to make such determinations (MacMillan
et al., 1985) as well as the entrepreneur's level of “personal” equity in the business (Prasad et al., 2000; Yoshikawa
et al., 2004). The owner-manager's level of personal equity in the business is believed to signal the quality of the
business to investors (especially if this personal equity represents a substantial portion of the owner-manager's
personal wealth) (Prasad et al., 2000) and reassure investors that the owner-manager will exert maximal effort to
achieve business success.
Business failure, as defined here, typically means that the residual value of the business is low or negative. Given
owner-managers personal wealth is closely intertwined with the value of the business, business failure indicates
diminished personal wealth. This is all the more likely for those who made personal guarantees for the business' bank
loans and when their business is in a negative net asset position. Although it is reported that some venture capitalists
view business failure as a badge of honor (Landier, 2004), most investors view it as a blight on a entrepreneur's track
record making it more difficult and/or more costly to acquire equity and debt capital (Lee et al., 2007). During and
immediately after business failure, many of these owner-managers will have a substantially reduced income (perhaps
relying solely on unemployment benefits). Over time, entrepreneurs can re-build their personal wealth, re-establish
legitimacy with equity investors, and re-build collateral for bank loans, such that they can once again found or acquire a
business. Although there is likely heterogeneity in an owner-manager's financial costs from business failure (an issue
we address below leading to Proposition 5), we propose the following:
Proposition 2. The higher owner-managers' financial costs after business failure, the longer the time interval between
the failed business and action to own and manage a subsequent business.
Given these assumptions — necessary and appropriate given the notion of rationality central to economics — even
prominent economists acknowledge their limitations when applied to practice. For example, Krugman himself (1989:
55–57) stated that “such calculations are…no substitute for real evidence on what firms actually do…”.3 Empirical
evidence does suggest that at least some owner-managers decide to persist despite poor performance by delaying
business failure (e.g., Gimeno et al., 1997). In the next section we briefly review the escalation of commitment and
procrastination literatures as possible explanations for persistence. We then develop the notion of anticipatory grief to
offer an alternate explanation — one where some persistence can enhance an owner-manager's recovery from business
failure.

3
Deviations from strict rationality in organizational decision making are well established in the literature (e.g., Cyert and March, 1963). We
suggest that the theories that we cover represent the dominant frameworks specifically applied to the decision to persist in the face of a losing course
of action.
138 D.A. Shepherd et al. / Journal of Business Venturing 24 (2009) 134–148

4. Explanations for why owner-managers delay business failure

4.1. Escalation of commitment and persistence

The escalation of commitment framework offers a possible explanation for why owner-managers may delay business
failure and persist with an underperforming business. Escalation of commitment refers to an increasing commitment to
the same course of action in a sequence of decisions resulting in negative outcomes (Karlsson et al., 2005a, b: 835;
Staw et al., 1997). Our review of the escalation of commitment literature (see also Karlsson et al., 2005a, b) generally
suggests three explanations for this behavior.
First, individuals persist with a losing course of action to satisfy a need to justify previous decisions to self and
others (cf. Brockner, 1992). Owner-managers are often confident that their businesses will be successful (Cooper et al.,
1988) and this confidence likely influences their strategic decisions and their relationship with others including
resource providers (Hayward et al., 2006). Business failure may repudiate these decisions and indicate hubris, so
owner-managers may escalate commitment to justify (to oneself and/or to others) that their initial decisions and actions
were accurate.
Second, escalation of commitment might occur as a result of an overgeneralization of a “don't waste” decision rule
(cf. Arkes and Blumer, 1985). That is, individuals continue an endeavor once they have made an investment of money,
time and/or energy because to terminate that course of action would appear wasteful and people have a desire not to
appear wasteful (Arkes and Blumer, 1985). This influence of sunk costs on future investments is well documented (Keil
et al., 2000). Owner-managers who found new businesses typically invest considerable personal resources, time and
energy into the business and therefore, it is not be surprising that owner-managers appear to be reluctant to terminate
their businesses under concerns that they might be perceived as having wasted these initial resources (Caves and Porter,
1976; Dean et al., 1997; Rosenbaum and Lamort, 1992).
Third, individuals may frame the persistence decision in terms of a sure loss (terminating the course of action now)
or as an uncertain loss (delaying the decision to terminate the course of action) preferring the uncertain loss despite the
knowledge that the uncertain loss is likely to be substantially higher than the certain loss (Garland and Newport, 1991).
This explanation of escalation of commitment is consistent with Prospect Theory's (Tversky and Kahneman, 1981)
notion that in loss situations people are risk seeking and in gain situations they are risk averse. Therefore, using this
possible explanation, owner-managers facing a certain loss (as associated with immediate business closure) are more
likely to choose to delay business failure by investing further personal resources into the business despite the likelihood
that the total financial losses will be greater.
There has been some debate as to whether escalation is restricted to situations when there is uncertainty surrounding
the outcomes of the continued course of action, or if escalation also occurs when it is possible to estimate the future
returns to investments (Garland et al., 1990; Heath, 1995; Karlsson et al., 2005a, b). For example, recently, Karlsson
et al., (2005a, b) found empirically that although there may be no uncertainty in terms of future outcomes — and people
know that they will be economically worse off by continuing to invest — they continue to do so. In another study
focused on new product development, Schmidt and Calantone (2002) demonstrate that managers responsible for
initiating a given project feel a stronger ownership to the project than managers who take over the project at some
later date; those founding the project were more committed to the project, likely to accelerate its development, and
continue to fund the project than non-founding managers (Schmidt and Calantone, 2002). This suggests that for owner-
managers, despite knowing that their businesses will fail and that delaying business failure through further personal
investments in the business will result in greater financial losses, they may still persist with the business. A review of
these empirical findings led Karlsson et al., (2005a, b: 67) to conclude that: “a more comprehensive understanding of
escalation requires disentangling people's non-economic reasons for escalation”. Procrastination offers an emotion-
based explanation for delaying business failure, to which we now turn.

4.2. Procrastination and persistence

Procrastination refers to the postponement of a behavior that is experienced as emotionally unattractive, but
cognitively important because it will lead to positive outcomes in the future (cf. Van Eerde, 2000). Procrastination
occurs when this emotional threat is dealt with by an avoidance response, which results in postponement of the action
(Lazarus and Folkman, 1984); the anticipation of the threat elicits negative emotions such as anxiety, and by escaping
 D.A. Shepherd et al. / Journal of Business Venturing 24 (2009) 134–148 139

from the situation this anxiety is reduced, which represents a negative reinforcement that helps sustain the pattern of
behavior (Anderson, 2003; Milgram et al., 1998: 299). Procrastination appears to be particularly relevant in the
entrepreneurial context. Owner-managers may procrastinate because it postpones the decision and actions of declaring
the business insolvent and forgoing ownership or management in the business. While an emotionally daunting
undertaking, it is a cognitively important task because the financial costs of business failure will be lower if additional
personal investments are not made by the owner-manager to delay business failure. Further, the literature suggests that
the greater the anticipated negative emotions of a task, the greater the likelihood of procrastination (Anderson, 2003).
Several factors influence the anticipation of negative emotions, and thus the chances of procrastination. First,
irreversible decisions generate more negative emotions (Anderson, 2003). Although it is possible for owner-managers
to start additional businesses, the decision to close a specific business is irreversible. Second, decision makers are also
likely to anticipate more negative feelings when they perceive themselves as being personally responsible for the
outcome. Owner-managers often view their business as an extension of themselves and their personalities (Bruno et al.,
1992; Cova and Svanfeldt, 1993) and are therefore likely to also consider themselves as personally responsible for the
outcome of the business. Finally, greater negative emotions are generated when one's own decisions “cause” the onset
of the negative outcome rather than when others make that decision. This could influence owner-managers to delay
business failure. Taken together, there are several characteristics of the decision and actions of declaring the business
insolvent that are likely to elicit procrastination.
In sum, theories of escalation of commitment and procrastination selectively reviewed above provide valuable
insights into the cognitive (primarily escalation of commitment) and emotional (primarily procrastination) biases that
encourage persistence. While the negative financial consequences from persistence are clear (Garland et al., 1990; Ross
and Staw 1986, 1993), the emotional consequences of persistence remain relatively under-explored. For example, in a
review of the literature, Anderson (2003: 142) concluded that: “it is interesting to note that the vast majority of
[procrastination] studies support the conclusion that emotional goals influence decision avoidance but that post-
decisional emotions are infrequently measured … It is reasonable to assume that people make choices that reduce
negative emotions”. It is this emotional consequence — in the context of the owner-manager's decision to persist by
delaying business failure — that we now consider. Specifically, we turn to the anticipatory grief literature to establish
an emotional link between the period before the business failure event and the period after the business failure event, to
suggest possible benefits to owner-managers from delaying business failure.

5. Anticipatory grieving and emotional recovery: an additional explanation for why owner-managers delay
business failure

Psychological research on bereavement has demonstrated that the level of grief over the death of a loved one
depends on the period of emotional processing in anticipation of the upcoming death.4 That is, the extent to which
individuals experience anticipatory grief (before the loss event) will influence the level of grief (after the loss actually
occurs), and importantly its corresponding emotional and psychological outcomes (Lindemann, 1944; Parkes and
Weiss, 1983; Rando, 1986). This concept of anticipatory grief has been extended beyond the loss of a loved one to
include a range of losses such as those associated with cardiac surgery (Christopherson, 1976), amputation (Wilson,
1977), and divorce (Roach and Kitson, 1989). We develop this notion of anticipatory grief to offer an alternate
explanation for the decision to delay business failure and persist with a failing business.
The notion of an owner-manager's anticipatory grief describes a phenomenon encompassing the process of
mourning, coping, interaction, planning, and psycho-social reorganization that are stimulated and begun in part in
response to the awareness of the impending failure of a business and the recognition of associated losses in the past,
present, and future (adapted from Rando, 1986). Research suggests that a period of anticipation leading up to an
impending loss is valuable because it allows the individual to emotionally prepare for the loss (Parkes and Weiss,
1983), by gradually withdrawing emotional energy from the object (loved one or business) being lost. This process
serves as an emotional safeguard when the loss actually occurs (Lindemann, 1944), allowing the individual to make
sense of the loss because it will be seen as part of a predicted process (Parkes and Weiss, 1983). In the end, anticipatory
grieving likely facilitates an owner-manager's process of emotionally coping with business failure, by better preparing
the owner-manager to learn from the experience and reinvest their emotions elsewhere.

4
Grief refers to the negative emotional reaction to the loss of something important (Archer, 1999).
140 D.A. Shepherd et al. / Journal of Business Venturing 24 (2009) 134–148

This benefit, however, may come at a cost. While anticipatory grief may ease the transition from owner and manager
of a business to no longer having these roles, the process leading up to business failure may be arduous and emotionally
draining. Research suggests that given anticipatory grieving, there appears to be mutually conflicting demands of
simultaneously holding onto, letting go of, and drawing closer to the object being lost (dying loved one or failing
business) (Rando, 1986). For example, following the realization that a loved one's illness is terminal, individuals begin
to emotionally distance themselves in order to prepare for the imminent death. But they will also become more
involved with the terminally ill loved one to maintain communication and interaction, to finish unfinished business,
and resolve past conflicts and to say goodbye (for a review see Rothaupt and Becker, 2007). Similarly, on the one hand,
owner-managers may begin to emotionally distance themselves from the business in order to prepare for business
failure, e.g., begin to separate their individual identities from those of their businesses by emphasizing membership in
other groups (Major and Schmader, 1998; Major et al., 1998). But on the other hand, the owner-manager becomes more
involved with the failing business attempting to resolve remaining issues and “put out the many fires” that ignite as a
business approaches insolvency. “A critically important task in anticipatory grief is to balance these incompatible
demands and cope with the stress their incongruence generates … It is no wonder that many grievers feel somewhat
immobilized. They are subject to such conflicting pulls all occurring at once, that they can get stuck in the middle just
like anyone else who is being pulled in contradictory directions” (Rando, 1986).
In terms of this balance, Rando (1983) and Sanders (1982) found that there was an optimal period of time of
anticipatory grieving which minimized the subsequent grief triggered by the loss event and maximized adjustment.
Periods of anticipatory grieving that were particularly short or particularly long were more likely to result in higher
levels of grief than for periods of anticipatory grieving of moderate length. For example, among parents whose children
had died of cancer, those having children experiencing a medium period of illness (6 to 18 months) were better
prepared for the death and adjusted better than parents whose children's illness was shorter than 6 months or longer
than 18 months (Rando, 1986). It appears that while long periods of illness allow for greater emotional preparation
(Parkes and Weiss, 1983), the emotional reserves (ability to cope with grief triggered by the death) are diminished.
Although the actual number of days or months that represent an optimal period for anticipatory grieving is an empirical
question that likely varies across parents of children dying of cancer and owner-managers whose businesses are failing,
this notion of an optimal period of anticipatory grieving may provide important insights into the emotional antecedents
and outcomes of persisting by delaying business failure.
Owner-managers are often aware that their business will fail before the event actually takes place.5 Indeed,
insolvency prediction models offer performance thresholds that when breached indicate that the business has passed the
point of no return and business failure is inevitable (or highly probable) (Altman, 1968; Ohlson, 1980; Zmijewski,
1984). These are similar to the models used by banks and other lending institutions to determine whether or not to
provide a business debt capital. Awareness that the business will fail also involves the realization that there will be no
“white knight” to rescue the company with a cash infusion. We suggest that this awareness can cause anticipatory grief
(cf., Lindemann, 1944; Rando, 1986), and is stimulated by losses that have already occurred, those that are currently
occurring, as well as those that are to come (Rando, 1986). For example, in managing the company during this troubled
time, the owner-manager may grieve over the vibrant and healthy organization slipping into decline in the face of a
“hostile” environment. He or she grieves for the changes in lifestyle that are imminent, and for the dreams of a business'
future that will never be realized. This is a grief over what is being lost right now. He or she is also likely to grieve over
the absence of the business in the future.
Rando (1986) suggested that although the true reality of the absence cannot completely be realized until the death
has occurred, it is possible to obtain a small, but important indication of what this will be like through extrapolation of
present experiences that foreshadow the permanent absence in the future. In the case of entrepreneurship, persisting
with a failing business provides an opportunity for the owner-manager to witness, and thus come to grips with, the
progressive debilitation of the business over which he or she is likely to have little control; this period of delay provides
time for the owner-manager to prepare for the business' inevitable failure.
We are suggesting that to persist in the face of an impending business failure is not necessarily a function of the
extent to which the owner-manager believes that “I can fix this” and recover the business. Despite a grim outlook, some

5
This may not always be the case. A natural or man-made disaster may terminate a business with no prior warning for the entrepreneur. In such a
case the period of anticipatory grieving is very small or non-existent.
 D.A. Shepherd et al. / Journal of Business Venturing 24 (2009) 134–148 141

owner-managers may be able to turn their businesses around, just as some individuals recover from seemingly
incurable cancer. Instead, we are suggesting that among owner-managers that eventually do fail, those who engage in a
grieving process anticipating the business failure will be emotionally better prepared for it. Being forewarned of the
upcoming loss is a necessary, but not sufficient, condition for anticipatory grief. For example, an accountant might
point out to the owner-manager that the business is rapidly heading towards insolvency and that all potential sources of
cash infusion have been exhausted. However, the owner-manager may be in a state of denial or simply avoids thinking
about the inevitable event (Kübler-Ross, 1969).6 Anticipatory grief requires some “grief work” to emotionally prepare
for business failure. The notion of “grief work” refers to working through and processing some aspect of the loss
experience (Bonanno and Keltner, 1997; Prigerson et al., 1996; Wortman and Silver, 1989, 1992). This does not mean
that the owner-manager must continuously focus on his or her anticipatory grief and forthcoming loss. Indeed, it
appears that processing a loss is enhanced when periods of grief work are interspersed with periods of avoiding
thinking about the business and proactively addressing secondary causes of stress triggered by the firm's poor
performance (Shepherd, 2003). However, an extended period of anticipatory grieving can be emotionally exhausting
exacerbating grief over business failure when the failure event eventually occurs.
Therefore, we would expect that with a quick failure process (a short period from failure awareness to the failure
event), the emotional preparation gained though anticipatory grieving would be insufficient for the owner-manager,
which could lead to higher levels of grief after the business failure event. For example, if a large and powerful
competitor appears without warning and puts an abrupt end to a business, the owner-manager is likely to have a very
short period of anticipatory grieving, providing little time for emotional preparation and therefore the owner-manager is
likely to experience substantial grief over the business' failure. If the failure process is substantially extended, as may
be the case in the face of changing consumer preferences that slowly reduce a firm's market share, this extended period
of anticipatory grieving could lead the owner-manager to become emotionally drained, which increases the level of
grief once the failure event occurs.
Therefore, we suggest that as long as the owner-manager anticipates that his or her business will fail, then they will
likely experience, and begin to process, anticipatory grief. Some will experience greater anticipatory grief, and some
will be more effective at processing it; but over and above these individual differences, the period of anticipatory grief
appears to have a curvilinear relationship with emotional recovery from business failure. Thus,
Proposition 3. There is a curvilinear relationship between the period of anticipatory grieving and the owner-
manager's grief triggered by the business failure event; the owner-manager's level of grief triggered by the failure event
decreases with persistence to a critical point but beyond this critical point further persistence increases the level of
grief triggered by business failure.
Research shows that some owner-managers are able to move on from a business failure and develop strong
intentions to start subsequent businesses (Schutjens and Stam, 2006) and that many owner-managers (47%) indeed start
a new business after going bankrupt (Small Business Administration, 1994). Business failure provides owner-managers
an opportunity to learn from the experience. Furthermore, it appears that entrepreneurial learning is mainly experiential
in nature (Corbett, 2005; Politis, 2005) providing serial owner-managers enhanced expertise in running a business
(Wright et al., 1997) and providing benchmarks for judging the relevance of information (Cooper et al., 1995). This
learning can lead to an understanding of the “real” value of new entrepreneurial opportunities, speed up the business
creation process, and enhance performance (Davidsson and Honig, 2003).
Further, the experience of failure itself may lead to the possibility of gaining unique knowledge that can not be
learned from successful entrepreneurship only (McGrath, 1999; Rerup, 2005). First, there is likely a direct relationship
between the opportunities that lead to failure and the possibility for owner-managers to learn. All else equal,
opportunities that deviate more from what already exists (exploiting a new technology vs. starting a new McDonald's
outlet) are riskier and have higher chances of failure, but these risky opportunities are also those that are more closely
related to learning (March, 1991). Second, the experience of business failure likely makes owner-managers more
thoughtful (Rerup, 2005). It leads them to start thinking along new patterns and search more openly for new ideas and

6
Again there are parallels here with the death of a loved one. The doctors may point out that death is approaching and that they have done
everything that is possible. Some individuals will acknowledge this information and begin anticipatory grieving, while others may enter a state of
denial and hold out the possibility of a “miracle”. This is a particularly salient decision for those faced with the decision of whether or not to remove
a loved one from a life-support system (see Werth, 2005; Wiegand, 2006).
142 D.A. Shepherd et al. / Journal of Business Venturing 24 (2009) 134–148

opportunities. Given this unique knowledge and expertise gained through previous entrepreneurial experience and
failure, owner-managers who have learned from business failure are in a unique position to start a successful new
business.
Although negative emotions such as those that constitute grief can highlight the importance of an event for further
scanning (Luce et al., 1997; Pieters and van Raaij, 1988; Schwarz and Clore, 1988), negative emotions can also
consume information processing capacity making it difficult to learn from the experience (Mogg et al., 1990; Wells and
Matthews, 1994) and difficult to make subsequent emotional investments (Cuisner et al., 1996; Shuchter, 1986). We
use the term emotional costs of business failure to refer to the negative role of grief on an owner-manager's ability to
learn from the experience and move on to other entrepreneurial actions, such as founding or acquiring another business.
Similarly, symptoms of grief, such as despair, disorganization and anger (Hogan et al., 2001) likely make it difficult for
owner-managers to focus energy and emotion on a new business. Thus,
Proposition 4. The greater the emotional costs of a business failure, the longer it will take for the owner-manager to
emotionally recover from business failure to own and manage a subsequent business.

6. Delaying business failure to balance the financial and emotional costs of failure

Our anticipatory grief explanation for delaying business failure to persist with a business introduces the need to
“balance” the owner-manager's financial and emotional costs to optimize his or her recovery. This “balance” likely
varies across individuals and across business failures within individuals. Earlier we made the case that owner-
managers' personal wealth is likely substantially diminished by the failure of their businesses. However, some owner-
managers may have much of their personal wealth insulated from business failure. For example, they may have a
diversified personal investment portfolio, have not offered personal guarantees for business loans, and/or business
failure is a badge of honor by venture capitalists in this particular industry. This lowers the financial cost of business
failure if it were to occur without any delay. However, regardless of the initial (without delay) financial cost of business
failure there is likely heterogeneity in the rate at which financial costs are accumulated with increasing delay of
business failure. That is, the financial cost of delay is likely greater for some owner-managers and their businesses than
others. For example, for those businesses that have a higher burn rate, greater financial investments are required to
delay business failure and in some industries assets depreciate at a faster rate meaning that the owner-manager's
residual claim on the business is decreasing at a faster rate.
We have also made the case that grief interferes with recovery and that owner-managers feel grief after business
failure. However there is likely heterogeneity in owner-managers' level of grief over business failure. First, grief is
greater over the loss of objects for which the individual has made sustained emotional “investments” (Jacobs et al.,
2000; Robinson et al., 1999). Therefore, consistent with the endowment effect (Loewenstein and Issacharoff, 1994;
Van Dijk and van Knippenberg, 1996), owner-managers' grief is likely greater over the failure of businesses that have
been owned and managed longer. Second, recent, multiple losses can result in an accumulation of grief (Nord, 1996).
As such, a business failure that occurs after a series of business failures will likely lead to higher levels of grief. Third,
the more importance attached by an individual to the object lost, the greater the level of grief (Archer, 1999). For
example, when the business forms a central role in the formation of the owner-manager's identity, then its failure is

Fig. 1. Balancing the financial and emotional costs of business failure to optimize recovery.
 D.A. Shepherd et al. / Journal of Business Venturing 24 (2009) 134–148 143

likely to generate high levels of grief (Belk, 1988). Therefore, some owner-managers may experience substantial grief
while others little grief over business failure.
Although we have proposed above that some delay in business failure can decrease the level of grief triggered by
business failure, there is likely variance in the extent to which owner-managers use this period of delay for anticipatory
grieving and also variability in the effectiveness of their anticipatory grieving. Some owner-managers may delay
business failure for reasons explained by the escalation of commitment or procrastination literatures and are in denial
over the impending business failure — there is little to no anticipatory grieving. Some may use the delay for
anticipatory grieving but are not good at it. For example, Shepherd (2003) proposed that grief recovery over business
failure is enhanced when the individual oscillates between a loss — confronting the loss, revisiting the events before
and at the time of the death, and “working through” some aspect of the loss experience (Shepherd, 2003; Stroebe and
Schut, 1999). — and a restoration orientation — distracting oneself from thoughts related to the loss and focusing on
addressing secondary causes of stress (Archer, 1999; Shepherd, 2003; Stroebe and Schut, 1999). There is likely
variability in the extent to which individuals oscillate between these two orientations while dealing with anticipatory
grief. Thus,
Proposition 5. Some persistence can enhance an owner-manager's overall recovery from business failure when there
is a strong relationship between persistence and emotional costs relative to the relationship between persistence and
financial costs.
Our model with its five propositions is depicted in Fig. 1. The model suggests that longer persistence increases
financial costs (P1), and that financial cost has a negative effect on overall recovery (P2). The relationship between
persistence and emotional cost has a U-shape so that emotional cost is minimized with a period of medium persistence
(P3) and that emotional cost has a negative impact on overall recovery (P4). Finally, if emotional cost dominates over
financial cost, the relationship between persistence and overall recovery will be U-shaped (P5).

7. Discussion

Why owner-managers delay business failure when it is financially costly to do so? The dominant explanation in
the literature is simply that the decision to delay business failure is biased — these entrepreneurs are wrong. We
offer a different explanation, or at least offer the possibility that some of these owner-managers are operating in
their own best interests. Specifically, we focused on the owner-managers' recovery from business failure to once
again own and manage a business, thus engaging in serial entrepreneurship. We acknowledged that business failure
is likely to be financially costly to the owner-manager, and the greater the financial costs the more difficult the
financial recovery. However, we complemented this financial perspective by highlighting the role of negative
emotions surrounding business failure and the importance of emotional recovery. Owner-managers are likely to
experience grief over business failure, which retards recovery. Developing the notion of anticipatory grief, we
proposed that some period of anticipatory grief provided by delaying business failure could minimize the level of
grief triggered by the failure event. Considering recovery as a (negative) function of both financial and emotional
costs born by business failure, our anticipatory grief model provides a possible explanation for delaying business
failure — an explanation based on balancing the financial and emotional costs of business failure to optimize
recovery. We believe that our anticipatory grief perspective to delaying business failure has a number of
implications for scholars.
First, our model offers a counter-weight to the economic and escalation literatures that explain persistence in terms
of biases and decision errors. We suggest that in some cases (for some owner-managers and/or for some business
failures) some persistence before business failure can be beneficial to the owner-manager. This potentially opens up
new ground for research on escalation of commitment. For example, it suggests the possibility of extending the scope
of these studies beyond the boundaries of a single project. Perhaps what appears to be a bias for one project might be
beneficial to the decision maker across a series or portfolio of projects. Moving beyond a single project highlights the
need to consider dependent variables other than simply the financial costs of persistence. Here we have highlighted the
importance of the emotional costs of business failure and subsequent emotional investments.
Second, while the procrastination literature acknowledges emotion as a possible cause of persistence, by definition
this persistence is to the long-run detriment of the individual. We offer the possibility that by acknowledging the role of
emotion and its processing (anticipatory grief and grief) persistence may provide some long-run benefit (rather than
144 D.A. Shepherd et al. / Journal of Business Venturing 24 (2009) 134–148

detriment) to the individual. Therefore, while some owner-managers' persistence might be accurately described as
procrastination in other cases this might be an inappropriate classification and more appropriately explained by our
anticipatory grief perspective. That is, delaying business failure might better balance the financial and emotional costs
of business failure to optimize recovery. To distinguish between procrastination and anticipatory grief as an appropriate
explanation for persistence requires the consideration of emotional outcomes as well as emotional inputs. By doing so
in this paper, we have taken a small step towards addressing Anderson (2003) observation that there is a dearth of
research on the role of people's desire to reduce negative emotions.
Third, it is not surprising that business scholars have focused on the financial aspects of delaying business failure, or
that scholars of bereavement and grief have focused on the emotional aspects of the delayed death of a terminally ill
loved one. We have stressed the importance of considering both the financial and the emotional in understanding
recovery from business failure. Although anticipatory grief and grief have been extended to important losses other than
of a loved one (Christopherson, 1976; Roach and Kitson, 1989; Wilson, 1977), the focus has still been on emotional
outcomes. With great caution we take some small steps to suggest that perhaps there is a financial component to some
of these situations. For example, how do people make their decision to delay divorce? Does such a decision impact their
financial and emotional recovery from divorce? It appears that some people grieve in anticipation of a divorce (Roach
and Kitson, 1989). Perhaps there are some benefits to persisting for a period in a “bad” marriage before divorcing to
allow for emotional preparation for the event. There is much work to be done in exploring the financial and emotional
costs of losing something important.
Fourth, our model complements existing work on grief over business failure. Shepherd (2003) model begins with
the business failure event and the subsequent triggering of a negative emotional reaction. We introduce the notion of
grief that occurs in anticipation of business failure and how this anticipatory grief influences the level of grief triggered
by the business failure event. Furthermore, Shepherd (2003) focused on enhancing the grief recovery process so that
entrepreneurs could maximize their learning from the experience. We focus on the period of anticipatory grieving that
balances the financial and emotional costs of failure to optimize a more general form of recovery.
Finally, in recent years there has been increased interest in the emotional bonds between entrepreneurs and their
businesses. There is research to suggest that entrepreneurs make sustained emotional “investments” in their businesses
(Cardon et al., 2005) and that their businesses form central roles in the formation of entrepreneurs' identities (Downing,
2005). The work of Cardon and her co-authors (2005), for example, appear to reflect (or have stimulated) a resurgent
interest in entrepreneurial passion. In our research, we examine the flip-side of passion, i.e., grief. We hope that future
research attempts to explore multiple emotions — particularly negative (such as a grief) and positive (such as passion) —
throughout the entrepreneurial process including start-up, failure and re-start.
There is considerable scope for future theoretical and empirical research, and this research could extend our current
boundary conditions and challenge current implicit assumptions. For example, we assume an additive (main effect)
relationship between the financial and emotional costs of business failure in determining total costs and in contributing
to recovery. But perhaps the relationship between business failure and emotional costs (and eventually total costs)
depends on the level of financial costs from business failure. It could be that more financially costly business failures
exacerbate the level of grief from the event, magnify or diminish the “weight” given to emotional costs in determining
total costs, and/or slow the grief recovery process (controlling for the initial level of grief). There are a lot of interesting
possibilities in exploring the relationship between the financial and emotional costs of business failure in optimizing
recovery. We believe that proposing an additive (main effect) relationship is an appropriate first step — one that
accommodates a positive correlation between financial and emotional costs but leaves open the possibility of a
multiplicative relationship.
Future research can also investigate which people are likely to best utilize the period before business failure to grieve
in anticipation of the event to reduce the emotional costs of business failure. Explanations for these individual
differences might include coping self efficacy (Benight and Bandura, 2003; Benight et al., 2001), prior experiences
with business failure and/or other important losses, and emotional intelligence (Goleman, 1995; Huy, 1999; Ramos
et al., 2007; Salovey and Mayer, 1990). For example, it is likely that emotionally intelligent owner-managers recognize
their negative emotions arising from the failing business as anticipatory grief, are better able to regulate these emotions,
and perhaps more effectively process anticipatory grief such that they require a shorter delay of business failure
to optimize recovery. Investigations of individual differences in anticipatory grief and grief, such as emotional
intelligence and other learned abilities, will likely make important contributions to our understanding of owner-
managers' recovery from business failure.
 D.A. Shepherd et al. / Journal of Business Venturing 24 (2009) 134–148 145

Central to empirical research is being able to measure anticipatory grief, the period of business failure delay, grief,
and recovery. There are existing measures of anticipatory grief (Butler et al., 2005; Mystakidou et al., 2005) and grief
(Hogan et al., 2001; Prigerson et al., 1997) primarily from the “death of a loved one” literature that could be adapted to
the business failure context. The period of business failure delay could be measured as the number of days after the
business reaches a threshold specified by bankruptcy prediction models. Financial recovery can be measured in terms
of money, assets, and access to capital (relative to some benchmark such as the level before the business started
performing poorly or at the time of first becoming an owner-manager), emotional recovery in terms of the absence of
grief (using the grief measure), and overall recovery in terms of whether the individual again becomes an owner-
manager. Not to indicate that these are easy tasks, but the greatest challenge likely lies in the design to collect data. For
example, it might be difficult to find owner-managers of failing businesses, to secure their involvement in the study,
and maintain their involvement over an extended period during a difficult time in their life and asking them to disclose
very personal information. An alternative to a field study is an experiment, although it also has its challenges. For
example, it might be difficult to generate the emotions of a real-life business situation — the emotional investment, the
anticipatory grief, the grief and the engagement of a grief recovery process. The flip-side of these difficulties is the very
real opportunity of making an important contribution to the literature and perhaps to entrepreneurs attempting to
recover from business failure.

8. Conclusion

In this paper we proposed that emotions are more than simply a factor that bias owner-managers such that they delay
business failure to their own peril. Emotions occur before and after the failure event and impact the emotional recovery
of an owner-manager. That is, a period of grieving that anticipates business failure can decrease the level of grief
triggered by the failure event and thus enhance emotional recovery. Recovery is a function (negative) of both the
financial and emotional costs of business failure. Therefore, we propose that in some situations persistence by delaying
business failure can balance the financial and emotional costs of business failure to optimize recovery.

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