Exit of Small Businesses: Differentiating between Insolvency, Voluntary Closures and M&A

In this paper, we examine the determinants of M&A, voluntary business closure and bankruptcy of mature SMEs in Japan between 2002 and 2015, using nested logit models. We show that high leverage and extremely poor operating performance are major reasons for exits in the cases of voluntary closures or bankruptcies, while firms involved in M&A are less leveraged and profitability is not as poor as for exited firms. Consistent with previous studies on internal capital markets, group firms or subsidiaries are more likely to be involved in M&A and less likely to go bankrupt. Bankrupt firms have more debt but low cash holdings in comparison with voluntarily closures. Additionally, smaller firms with aging entrepreneur founders are more likely to voluntarily close their businesses, probably due to lack of successors. Our results are driven by independent SMEs.