The role of financial constraints for alternative firm exit modes

Abstract

The paper proposes a new multidimensional instrument for measuring a firm’s latent financial constraints and tests it in explaining their heterogeneous impact on different firm exit routes. Applying the proposed measure to Slovenian manufacturing and service firms in the 2006–2012 period suggests three dimensions of firms’ financial constraints, i.e. liquidity, operational efficiency and profitability. Whereas the liquidity dimension is important for court-driven and law-based exits, the efficiency dimension is critical for firms’ voluntary liquidation, while profitability is for the relative likelihood of being merged or acquired. These effects of financial constraints on firm exit processes tend to be intensified during the crisis period. The results also confirm that SMEs differ systematically from larger firms in terms of the sensitivity of the exit decision to financial constraints for all but merger and acquisition (M&A) exit routes.