Firm Exit Research Articles

Entry and Exit, Unemployment, and Macroeconomic Tail Risk

This paper builds a nonlinear business cycle model with endogenous firm entry and exit and equilibrium unemployment. The entry and exit mechanism generates asymmetry and amplifies the transmission of productivity shocks, exposing the economy to significant tail risk. When calibrating the rates of entry and exit to match their shares of job creation and destruction, our quantitative model generates higher-order moments consistent with U.S. data. Firm exit particularly amplifies the severity and persistence of deep recessions such as the COVID-19 crisis. In the absence of entry and exit, the model generates almost no asymmetry or tail risk.

Regulatory compliance under enforcement gaps

Analyses in the literature on regulatory enforcement usually assume that regulatory agencies know all of the entities subject to regulation. But constant entry and exit of firms create gaps in agencies’ knowledge of regulated entities. This paper conducts a theoretical and empirical analysis of firms’ compliance strategy when such enforcement gaps are present. Our theoretical analysis indicates that a firm with a sufficiently low probability of being subject to enforcement action will delay compliance. We analyze the effect of enforcement gaps on the compliance protocol development component of regulations empirically in the context of nutrient management regulations in Maryland. The Maryland Department of Agriculture (MDA), which enforces this regulation, relies on a registry of farms that includes less than half of the farm operations in the state. We conduct an econometric analysis using farm-level survey data combined with county-level enforcement data. Our econometric model indicates that the probability of being included in the MDA farm registry is associated with a statistically significant and economically meaningful increase in the probability of being in compliance with nutrient management regulations. This result suggests that enforcement gaps can have a significant effect on the performance of environmental regulations.

Internet use, competition, and geographical rescoping in Yellow Pages advertising

This paper examines the effect of Internet penetration on competition and prices in the market for Yellow Pages advertising. We find that the diffusion of the Internet is associated with a decrease in the number of competitors and average prices for printed advertisements in the long-run. However, the decrease in prices is attenuated both by increasing market concentration as firms exit and by geographic rescoping as remaining firms reposition their products.

How Does Transport Infrastructure Shape Industrial Competitiveness? A Perspective From Industry Dynamics

How do improvements in transport infrastructure shape industrial competitiveness? Previous studies have emphasized the role played by agglomeration economies, with the contribution of industry dynamics largely being overlooked. In order to fill this gap, in this article we have researched the impact of improved transport infrastructure on industrial competitiveness, and we have put forward a new mechanism considering industry dynamics. Based on a sample of Chinese manufacturing firms over the period of 1998–2007, we have examined the impact of improvements to transport infrastructure on the exit and entry of firms from the market. The empirical findings confirm that improved transport infrastructure leads to the exit of less productive incumbents and increases the average productivity of new entrants in the market, and show that this effect is more significant for nonrelationship industries. This demonstrates that transport infrastructure promotes industrial competitiveness by reshaping the evolution of industry dynamics. This article contributes to academic literature on infrastructure management, exploring a new mechanism for explaining the impact of improved transport infrastructure on industrial competitiveness. It also provides some guidance to, and entails certain practical implications for, the development of emerging economies.

A Race to Lead: How Chinese Government Interventions Shape the Sino-US Production Competition

Using U.S. and China establishment-level data, this paper studies the dynamic interdependence in industrial activities between the U.S. and China. In a VAR framework, high birth rates of Chinese firms predict same-industry firm exits and lowered employment in the U.S., particularly in the export-intensive industries. Moreover, high industry subsidy from the Chinese government is followed by a decrease in the number of establishments and employment in the corresponding U.S. industries, although these subsidies are not motivated by existent deterioration in investment opportunities in the targeted industries in the developed world. China's Five-year Plans offer a tight causal inference as shocks to China's industry growth. These shocks were not preceded by low productivity or valuation in the same industries in the U.S. but were followed by shrinkage of establishments and employment in these industries.

Monetary Policy, Firm Exit and Productivity

We analyze the influence of monetary policy on firms' extensive margin and productivity. Our empirical evidence for the U.S. based on a macro-financial SVAR suggests that expansionary monetary policy shocks stimulate corporate profits, reduce firm exit and increase firm entry. In the medium run, exit overshoots the baseline. We rationalize these findings in a general equilibrium model featuring endogenous entry and exit. In the model, expansionary monetary policy shocks increase firm profits by stimulating aggregate demand and thereby allow less productive firms to remain in the market. As the monetary stimulus fades, these less productive firms become unprofitable such that exit overshoots. This exit channel of monetary policy implies a flatter aggregate supply curve and therefore amplifies output responses, but dampens inflationary effects.

High-growth firm shares in Austrian regions: the role of economic structures

ABSTRACT This paper explores the structural determinants of high-growth firm shares in Austrian regions. The regional level of analysis allows one to uncover regularities that are not detectable in firm-level studies. It is found that lower mobility barriers, firm exits and technological opportunities, measured by digitalization intensities, and, to a lesser extent, agglomeration effects are associated with a larger share of high-growth firms. The results suggest that comparisons of shares of high-growth firm across countries and regions should consider differences in the industrial structures together with the often-emphasized differences in policies and regulations.

Churning in Rural and Urban Retail Markets

Using data on the universe of taxable retail sales, retail firm start-ups, and retail firm exits in Iowa from 1992 through 2011, we test whether patterns of retail firm entry and exit are consistent with churning. Consistent with churning, the same factors that increase retail sales in a local market also increase new retail firm entry and either increase or do not affect retail firm exit. Evidence suggests that there is more churning in urban than in rural markets. Similar evidence is found using a sample of national firm entry and exit into local markets. If churning increases productivity growth, then the greater churning rate in urban markets is another source of agglomeration advantages in thick markets.

Competition, selection, and productivity growth in the Chilean manufacturing industry

Abstract Competition is considered as a key driver of productivity growth. However, the empirical evidence on its impact is scant in developing countries. Using information from manufacturing plants for the period 1995–2007, we analyze the impact of competition on firm selection and productivity growth in Chile. Our results indicate that competition has a positive effect on total factor productivity (TFP) growth, especially for laggard firms. We find weaker evidence that competition affects the probability of exit for low-productivity firms. In general, these results for productivity growth are robust to alternative methodologies for calculating productivity and to the inclusion of other variables that may affect firms’ TFP growth. We find support for Schumpeterian forces, but the quantitative impact is small.

Destruction and Reallocation of Skills Following Large Company Exit

What happens to redundant skills and workers when a large company closes down in a region? The knowledge embodied in firms is lost when firms exit. However, the skills, competences and knowledge embodied in the displaced employees are suddenly released and can become channels of knowledge transfer for other firms that hire them. This process can be very disruptive. For instance, when a large, old and well-renowned company closes down displacing thousands of workers over a short period of time, then it may be a shock to the regional economy and lead to unemployment and skill destruction. The question then becomes: under which conditions are the redundant workers and their skills reallocated to productive use elsewhere in the regional economy and when do the workers find a job where their specific skills are less valuable to the new employer and the worker must start over acquiring new skills, that is, skill destruction. This study is based on the closure of four shipyards in Denmark from 1987-2000. The analysis is based on detailed longitudinal micro data from a matched employer-employee dataset that allow us to follow the mobility of the laid-off employees in great detail. The analysis shows that mobility of workers to related industries leads to less skill destruction. The presence of related industries in the region matters for the extent of skill reallocation and skill destruction. The voluntarily mobile displaced workers also experience less skill destruction, because they find a job that matches their current skills.

TECHNOLOGICAL ABSORPTIVE CAPACITY AND DEVELOPMENT STAGE: DISENTANGLING BARRIERS TO RICHES

Adoption of better technologies is a crucial way for developing countries to close productivity gaps with leading economies. However, the possibility of growing through technological adoption depends decisively on the country’s absorptive capacity. We build a theoretical model of technology adoption that focuses on four factors that shape the countries’ technological absorptive capacity, namely: (i) years of education; (ii) quality of the educational system; (iii) barriers that impede the entry and exit of firms; and (iv) the institutions that enhance or impede the diffusion of new technologies. We calibrate the model for a sample of 86 economies. The USA is our benchmark leading economy. We disentangle the relative weight of each development factor in explaining per capita income differences and study patterns in relationships between the type of development barrier and the level of development. Our results show that in relative terms, years of education and education system quality along with high barriers to opening new firms are the main impediments that middle- to high-income economies face in closing the gap with the USA. Education as a whole (quality plus years of education) explains 50% of the gap between high-income countries (HICs) and the USA, while the entry costs account for nearly 25% of this gap. A remarkable result is the small effect that individual reforms have on steady-state productivity in low-income countries (LICs). Outside of institutional framework, the remaining three factors are individually responsible for less than 15% of the gap. This result is explained by poor global absorptive capacity that reduces the effect of each factor when implemented individually. In fact, there are significant nonlinearities between development level and the effects of individual reforms, which are due to the strong complementarities between the different development factors.

Local institutional heterogeneity & firm dynamism: Decomposing the metropolitan economic freedom index

A nascent body of research suggests that economic freedom is positively associated with entrepreneurial activity. Most of this literature is based on cross-countries analyses, although there is significant regional heterogeneity in entrepreneurial activity and the institutional and policy context within countries. The literature also largely overlooks the potential for the entrepreneurial inducing effects of economic freedom to drive less efficient firms out of the market. Additionally, economic freedom is a multi-dimensional construct comprised of numerous underlying aspects of the institutional and policy environment, but most studies have employed a composite economic freedom measure to assess its impact on entrepreneurial activity. I contribute to these gaps in the literature by decomposing the recently developed Metropolitan Economic Freedom Index into its underlying institutional indicators to explore their potential impact on the firm entry and firm exit rates for a sample of nearly 300 US cities over the period 1972–2012.

How endogenous risk preferences and sample selection affect analysis of firm survival

The roles of selection and endogeneity in measured risk preferences are illustrated using the correlation between risk attitudes and firm survival. Selection bias occurs when risk attitudes are elicited only from current entrepreneurs so that the risk attitudes of unsuccessful entrepreneurs are excluded from the analysis. Risk attitudes measured after agents enter entrepreneurship will endogenously reflect business success. Data on entrepreneurs from the National Longitudinal Survey of Youth 1979 and the Panel Study of Income Dynamics shows that when risk attitudes are measured subject to selection and endogeneity, mixed or even positive correlations between risk acceptance and the probability of firm exit occur. However, firm exits fall monotonically with willingness to accept risk when risk preference measures are not subject to selection or endogeneity related to business success.

Firm Exit During Recessions

We analyze a general equilibrium model of firm dynamics to study the effects of shocks to productivity, labor wedge, and collateral constraint (credit shock) on firm exit. We find that only the credit shock increases firm exit. This result is robust to the magnitude of shocks and different model specifications. Calibrating the model to match the behavior of output, employment, and firm debt during the Great Recession (2007-2009) in the United States, we find that the credit shock accounts for the observed rise in firm exit and its concentration among young firms. Furthermore, it accounts for 20 percent of the drop in output and employment.

Structural Changes in Japanese Firms: Business Dynamism in an Aging Society

The COVID-19 pandemic has posed a serious threat to the survival of Japanese firms, highlighting the importance of understanding how and why firms exit. In this paper, we use a rich firm-level dataset of Japanese firms to document how firm exit patterns have evolved between 2007 and 2017. Firm exit patterns have been heavily influenced by Japan's demographic trends, as a majority of exits in recent years were voluntary exits of firms (business closures) owned by CEOs aged 65 years or older without business successors. In contrast to this increase in voluntary exits, other 'traditional' firm exits (such as bankruptcies), have declined. These findings underscore the importance of addressing business transition issues in a rapidly aging society.

Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?

We present a theory of Keynesian supply shocks: supply shocks that trigger changes in aggregate demand larger than the shocks themselves. We argue that the economic shocks associated to the COVID-19 epidemic—shutdowns, layoffs, and firm exits—may have this feature. In one-sector economies supply shocks are never Keynesian. We show that this is a general result that extend to economies with incomplete markets and liquidity constrained consumers. In economies with multiple sectors Keynesian supply shocks are possible, under some conditions. A 50% shock that hits all sectors is not the same as a 100% shock that hits half the economy. Incomplete markets make the conditions for Keynesian supply shocks more likely to be met. Firm exit and job destruction can amplify the initial effect, aggravating the recession. We discuss the effects of various policies. Standard fiscal stimulus can be less effective than usual because the fact that some sectors are shut down mutes the Keynesian multiplier feedback. Monetary policy, as long as it is unimpeded by the zero lower bound, can have magnified effects, by preventing firm exits. Turning to optimal policy, closing down contact-intensive sectors and providing full insurance payments to affected workers can achieve the first-best allocation, despite the lower per-dollar potency of fiscal policy.

Monetary Policy, Firm Exit and Productivity

We analyze the influence of monetary policy on firms' extensive margin and productivity. Our empirical evidence for the U.S. based on a macro-financial SVAR suggests that expansionary monetary policy shocks stimulate corporate profits, reduce firm exit and increase firm entry. In the medium run, exit overshoots the baseline. We rationalize these findings in a general equilibrium model featuring endogenous entry and exit. In the model, expansionary monetary policy shocks increase firm profits by stimulating aggregate demand and thereby allow less productive firms to remain in the market. As the monetary stimulus fades, these lessproductive firms become unprofitable such that exit overshoots. This exit channel of monetary policy implies a flatter aggregate supply curve and therefore amplifies output responses, but dampens inflationary effects.

Determinants and Consequences of Small Audit Firm Exits from the PCAOB-Regulated Audit Market

The number of small audit firms serving public companies shrank dramatically during our sample period of 2003-2018. Sixty percent of triennially inspected U.S. audit firms that registered with the PCAOB in that era subsequently de-registered. This study examines the strategic decisions of small U.S.-based audit firms to exit or remain in the PCAOB-regulated audit market. Prior research shows that many small firms exited in the early post-SOX period when major PCAOB regulations were initiated. However, we find that most de-registrations in our broader sample period do not occur in years proximate to such regulatory shocks, including the previously unstudied initiations of Form 2, 3, and AP disclosures. We propose that de-registrations largely are due to strategic costs and benefits other than PCAOB initiatives. We find that proxies for these strategic constructs are significant explanators of decisions to de-register. We investigate the previously unstudied topic of what happens to small audit firms after they de-register. We find that more than half continue to operate as independent entities; to provide audit and attest services; and to have their audits peer reviewed. Therefore, they provide audit services to the large market of non-public companies. The approximately twenty-five percent of firms that merge surrounding de-registrations are larger than other de-registering firms, charge higher fees, and have higher audit quality.

Minimum Wage and Financially Distressed Firms: Another One Bites the Dust

Since late 2014, Portuguese Governments adopted ambitious minimum wage policies. Using linked employer-employee data, we provide an econometric evaluation of the impact of those policies. Our estimates suggest that minimum wage increases reduced employment growth and profitability, in particular for financially distressed firms. We also conclude that minimum wage increases had a positive impact on firms' exit, again amplified for financially distressed firms. According to these results, minimum wage policies may have had a supply side effect by accelerating the exit of low profitability and low productivity firms and, thus, contributing to improve aggregate productivity through a cleansing effect.

Minimum Wages and Firm Dynamics: Evidence From Costa Rica's Occupation-Based System

This paper analyzes the impact of minimum wages on different margins of firm dynamics using Costa Rica's occupation-specific minimum wage setting. To this purpose, I assemble rich administrative data covering the universe of workers and firms in the 2006-2017 period to construct firm-level exposure measures to the minimum wage policy, and estimate the impact of differential exposure to the minimum wage on firm outcomes at several year horizons. The analysis yields two important results: First, minimum wages induce firms to increase their labor shares, but with a negative and persistent impact on their profitability. The positive effect on the labor shares moderates as firms reduce their employment levels and expand their capital stocks. Second, raising minimum wages increases firm exit and lowers firm entry, with an estimated adverse effect on employment of 0.8 percent due to the missing entrants associated with the policy.