Growth paths and routes to exit: ‘Shadow of Death’ effects for new firms in Japan

Research has recently emphasized that the non-survival of entrepreneurs can be disaggregated into distinct exit routes such as merger and acquisition (M&A), voluntary closure and failure. Firm performance is an alleged determinant of exit route. However, there is a lack of evidence linking exit routes to their previous growth performance. We contribute to this gap by analysing a cohort of incorporated firms in Japan, and find some puzzles for the standard view. In the Japanese context, not all exit routes are available to all firms: small firms do not realistically face the options of M&A or bankruptcy, but essentially face a choice between survival and voluntary liquidation. Our empirical analysis suggests that sales growth generally reduces the probability of exit by merger,voluntary liquidation, and also bankruptcy. However, the relationship is U-shaped - such that rapid growth actually increases the probability of exit. More generally, each of the three exit routes can occur all across the growth rate distribution. Large firms are more likely to exit via merger or bankruptcy, while small firms are more likely to exit via voluntary liquidation.