The financial vulnerabilities driving firms to the exit

This special feature investigates the influence of financial vulnerabilities on the likelihood that firms will exit the market. We fill a gap in the literature by analysing comprehensive data on firm exits together with data on the financial accounts of firms, both aggregated at the sector level. We find that high short-term debt and low earnings relative to interest expenses are the two most significant financial predictors of firm exits. Moreover, there is a two-year lag from a rise in vulnerabilities to the peak in exits. We also find evidence that sector-level vulnerabilities magnify the likelihood that weaker sales or tighter lending conditions tip firms over the brink. The unprecedented Covid-19 shock notwithstanding, our analysis suggests that while exits may remain contained in the near term, pressures to exit are likely to build up over time.