IDEAS home Printed from https://ideas.repec.org/p/eti/dpaper/19051.html
   My bibliography  Save this paper

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

Author

Listed:
  • Peng XU

Abstract

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.

Suggested Citation

  • Peng XU, 2019. "Exit of Small Businesses: Differentiating between Insolvency, Voluntary Closures and M&A," Discussion papers 19051, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:19051
    as

    Download full text from publisher

    File URL: https://www.rieti.go.jp/jp/publications/dp/19e051.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-1366, September.
    2. Dirk Jenter & Katharina Lewellen, 2015. "CEO Preferences and Acquisitions," Journal of Finance, American Finance Association, vol. 70(6), pages 2813-2852, December.
    3. Michael C. Jensen, 2010. "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 43-58, January.
    4. Michael C. Jensen, 2010. "Active Investors, LBOs, and the Privatization of Bankruptcy," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 77-85, January.
    5. Arturo Bris & Ivo Welch & Ning Zhu, 2006. "The Costs of Bankruptcy: Chapter 7 Liquidation versus Chapter 11 Reorganization," Journal of Finance, American Finance Association, vol. 61(3), pages 1253-1303, June.
    6. Ronan G. Powell, 1997. "Modelling Takeover Likelihood," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(7&8), pages 1009-1030.
    7. Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September.
    8. Douglas W. Diamond, 2004. "Presidential Address, Committing to Commit: Short-term Debt When Enforcement Is Costly," Journal of Finance, American Finance Association, vol. 59(4), pages 1447-1479, August.
    9. Nico Dewaelheyns & Cynthia Van Hulle, 2006. "Corporate Failure Prediction Modeling: Distorted by Business Groups' Internal Capital Markets?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5-6), pages 909-931.
    10. DeTienne, Dawn R., 2010. "Entrepreneurial exit as a critical component of the entrepreneurial process: Theoretical development," Journal of Business Venturing, Elsevier, vol. 25(2), pages 203-215, March.
    11. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, vol. 98(5), pages 1943-1977, December.
    12. Andrei Shleifer & Robert Vishny, 2011. "Fire Sales in Finance and Macroeconomics," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 29-48, Winter.
    13. Raghuram Rajan & Henri Servaes & Luigi Zingales, 2000. "The Cost of Diversity: The Diversification Discount and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(1), pages 35-80, February.
    14. Julian Franks & Oren Sussman, 2005. "Financial Distress and Bank Restructuring of Small to Medium Size UK Companies," Review of Finance, European Finance Association, vol. 9(1), pages 65-96.
    15. Maksimovic, Vojislav & Phillips, Gordon & Prabhala, N.R., 2011. "Post-merger restructuring and the boundaries of the firm," Journal of Financial Economics, Elsevier, vol. 102(2), pages 317-343.
    16. Hyun-Han Shin & René M. Stulz, 1998. "Are Internal capital Markets Efficient?," The Quarterly Journal of Economics, Oxford University Press, vol. 113(2), pages 531-552.
    17. Wennberg, Karl & Wiklund, Johan & DeTienne, Dawn R. & Cardon, Melissa S., 2010. "Reconceptualizing entrepreneurial exit: Divergent exit routes and their drivers," Journal of Business Venturing, Elsevier, vol. 25(4), pages 361-375, July.
    18. Leroy, H. & Manigart, S. & Meuleman, M., 2009. "The planned decision to transfer an entrepreneurial company," Vlerick Leuven Gent Management School Working Paper Series 2009-13, Vlerick Leuven Gent Management School.
    19. Harhoff, Dietmar & Stahl, Konrad & Woywode, Michael, 1998. "Legal Form, Growth and Exit of West German Firms--Empirical Results for Manufacturing, Construction, Trade and Service Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 453-488, December.
    20. Vojislav Maksimovic, 2001. "The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Efficiency Gains?," Journal of Finance, American Finance Association, vol. 56(6), pages 2019-2065, December.
    21. Elena Simintzi & Vikrant Vig & Paolo Volpin, 2015. "Labor Protection and Leverage," Review of Financial Studies, Society for Financial Studies, vol. 28(2), pages 561-591.
    22. repec:bla:jbfnac:v:33:y:2006:i:5-6:p:909-931 is not listed on IDEAS
    23. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 473-494.
    24. Altman, Edward I, 1984. " A Further Empirical Investigation of the Bankruptcy Cost Question," Journal of Finance, American Finance Association, vol. 39(4), pages 1067-1089, September.
    25. repec:hrv:faseco:33077925 is not listed on IDEAS
    26. Sreedhar T. Bharath & Sandeep Dahiya & Anthony Saunders, 2007. "Lending relationships and loan contract terms: does size matter?," Proceedings 1049, Federal Reserve Bank of Chicago.
    27. Sofie Balcaen & Sophie Manigart & Jozefien Buyze & Hubert Ooghe, 2012. "Firm exit after distress: differentiating between bankruptcy, voluntary liquidation and M&A," Small Business Economics, Springer, vol. 39(4), pages 949-975, November.
    28. Julian Franks & Oren Sussman, 2005. "Financial Distress and Bank Restructuring of Small to Medium Size UK Companies," Review of Finance, Springer, vol. 9(1), pages 65-96, March.
    29. A. Bhattacharjee & C. Higson & S. Holly & P. Kattuman, 2009. "Macroeconomic Instability and Business Exit: Determinants of Failures and Acquisitions of UK Firms," Economica, London School of Economics and Political Science, vol. 76(301), pages 108-131, February.
    30. Marco Pagano & Fabio Panetta & and Luigi Zingales, 1998. "Why Do Companies Go Public? An Empirical Analysis," Journal of Finance, American Finance Association, vol. 53(1), pages 27-64, February.
    Full references (including those not matched with items on IDEAS)

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eti:dpaper:19051. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (TANIMOTO, Toko). General contact details of provider: http://edirc.repec.org/data/rietijp.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.