Preserving Firm Value Through Exit: The Case of Voluntary Liquidations

Abstract

Voluntary liquidations offer an interesting example of efficient and orderly asset reallocation. This study examines why firms liquidate, and what happens to their assets. One important determinant of voluntary liquidation concerns asset performance and marketability: liquidating firms have low asset productivity, low market-to-book ratios, and high liquidity. Another important determinant concerns management having the proper incentives to liquidate: high inside ownership, takeover pressure, and low debt levels. Financial factors thus establish whether a liquidation is profitable, while organizational factors determine whether management chooses to liquidate. The study also finds that many liquidating firm assets are sold to firms operating in the same industry. Returns to liquidating firm shareholders are significantly greater here, rather than when they are sold to firms in a different industry. Moreover, intra-industry liquidations tend to occur in superior performing industries when industry performance is at a peak.