The purpose of this paper is to examine the factors associated with three modes of firms’ exit (voluntary liquidation, involuntary liquidation and acquisition) in a mutually exclusive environment. In particular, three modes of exit are treated as independent events given that different causes and consequences exist for each exit mode. The data set is a panel of 4,408 US manufacturing firms spanning over the period 1976–1995.
The discrete choice model is used to establish a relationship between modes of exit and a set of explanatory variables, which are specific to the firm, industry and macroeconomic conditions. Use of panel data encourages us to estimate a random effects multinomial logistic regression model, which allows exit modes as mutually exclusive events and at the same time controls the firm-specific unobserved heterogeneity in the sample.
The analysis suggests that the determinants of voluntary liquidation are age, size, profitability, technology intensity and inflation level. The determinants of involuntary liquidation are size, leverage, profitability and inflation level. For acquisition, determinants are age, size, advertising intensity, Tobin’s q, GDP growth, inflation level and interest rate. The findings suggest that exit modes have a different set of determinants and the scale of effects of some common determinants such as age, size and profitability differs between exit modes.
The analysis presented in this study relies on data from US manufacturing firms only. Thus, there is a need to explore the determinants of exit modes in other countries as well using the proposed econometric model.
The findings presented in this paper are useful for managers and policymakers to design strategies/actions for avoiding particular mode of exit.
This study provides empirical evidence on the differences in factors associated with exit modes and confirms the existence of mutually exclusive nature of exit modes. Findings suggest that for future empirical studies on firm exit, the exit modes must be treated as a heterogeneous event.
The authors would like to thank the anonymous reviewers for their valuable comments and suggestions that greatly contributed to improving the quality of the paper. The authors would also like to thank the Editor for his suggestions and support during the review process. The authors of this article have not made their research data set openly available. Any enquiries regarding the data set can be directed to the corresponding author.
Irfan, M., Saha, S. and Singh, S.K. (2018), "A random effects multinomial logit model for the determinants of exit modes: Evidence from a panel of US manufacturing firms", Journal of Economic Studies, Vol. 45 No. 4, pp. 791-809. https://doi.org/10.1108/JES-03-2017-0075Download as .RIS
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