Growth Patterns and Exit Routes of Firms in Japan
Understanding a firm’s journey goes beyond the binary distinction of survival and failure. It is imperative to understand the various “exit routes” and the factors that influence them. Such an understanding of firm trajectories is valuable for policymakers, entrepreneurs, and investors.
Recent research has revealed that the non-survival of entrepreneurial firms can be distinguished by specific exit routes, such as initial public offerings (IPO), merger and acquisition (M&A), voluntary closure, and bankruptcy. While firm performance is considered a determinant of the exit route, there is a lack of clear evidence connecting growth performance to exit routes.
In this study, researchers from Japan analyzed a cohort of incorporated firms in Japan and investigated the “shadow of death” effects on exit routes, namely how the sales growth varied in the years right before exit. They defined the “shadow of death” as the period of 1–3 years before exit. Interestingly, little research until now has looked at whether the “shadow of death” effects apply to new companies, despite the fact that new ventures have high exit rates via several exit routes as well as volatile growth.
The researchers began by establishing a consensus viewpoint on pre-exit growth along exit routes. According to this perspective, there is a hierarchy of departure options, with IPO exit being the most advantageous, followed by M&A, voluntary liquidation, and bankruptcy. Exit by M&A and voluntary liquidation are usually not considered as failures, but as neutral or positive outcomes (e.g., in the case of a lucrative trade sale, or voluntary liquidation due to retirement after a successful career).
Next, they modified this conventional model for the case of Japan. Notably, all departure strategies—merger, voluntary liquidation, and bankruptcy—are widely regarded as bad news in the Japanese context as they are more likely to correspond to failure than to success. Their study showed that concentrating on the two years prior to exit was sufficient to adequately capture the primary “shadow of death” impacts in their setting.
They found that the sales growth in the years leading up to the exit was a key predictor of exit strategies. Lagged sales growth often lowered the likelihood of exit via merger, voluntary liquidation, and bankruptcy. Beyond a certain point, however, extremely rapid expansion raised somewhat the likelihood of exit. The likelihood of bankruptcy was generally lower for growing businesses.
In a broader sense, all three exit pathways are possible across the growth rate distribution. Small businesses exit more frequently through voluntary liquidation while large businesses are more likely to merge or go bankrupt.
Overall, this study shows that a firm’s growth performance can help predict the exit strategy it will likely pursue. However, not all exit strategies are appropriate for all enterprises and they are interpreted differently depending on the cultural and institutional context.
Link to the original journal article:
https://link.springer.com/article/10.1007/s11187-020-00341-z
About the author
Alex Coad is a Professor at Waseda University in Japan. He obtained a joint Ph.D. in Economics from the Université Paris 1 Panthéon-Sorbonne and the Sant’Anna School, Pisa, Italy. Prof. Coad is a highly-cited scholar in the areas of firm growth, entrepreneurship, and innovation, and has published over 80 articles in leading international peer-reviewed journals. He is also an editor at the journals Research Policy (Financial Times Top 50 list of journals for Business Schools) and Small Business Economics. He received the 2016 Nelson Prize at University of California Berkeley, USA.
