Heterogeneous exits: Evidence from new firms
Masatoshi Kato†
School of Economics,
Kwansei Gakuin University

Yuji Honjo‡
Faculty of Commerce
Chuo University†

Corresponding author
School of Economics, Kwansei Gakuin University
Address : 1-1-155, Uegahara, Nishinomiya, Hyogo 662-8501, JapanPhone: +81-(0)798-54-7265
Fax: +81-(0)798-51-0944
E-mail: masatoshi.kato@gmail.com‡
Faculty of Commerce, Chuo University
Address : 742-1 Higashinakano, Hachioji, Tokyo 192-0393, Japan
E-mail: yhonjo@tamacc.chuo-u.ac.jp

Abstract

This paper explores heterogeneous exits—bankruptcy, voluntary liquidation, andmerger—by focusing on new firms. Using a sample of approximately 16,000 firms
founded in Japan during 1997–2004, we examine the determinants of new-firm exit
according to forms of exit. Regarding industry-specific characteristics, our findings
indicate that new firms in capital-intensive and R&D-intensive industries are lesslikely to go bankrupt. In industries characterized by large amounts of capital and low
price–cost margins, new firms are more likely to exit through voluntary liquidationand merger. Region-specific characteristics, such as regional agglomeration andunemployment rate, have significant effects on the hazards of exit, and their effects
vary across different forms of exit. Moreover, we provide evidence that firm- andentrepreneur-specific characteristics play significantly different roles in determining
each form of exit.

1

1.

Introduction

Many new firms exit the market after starting their businesses. Some firms areforced to go bankrupt because of business failure, and other firms disappear becauseof merger, which might be regarded as the result of success. In addition, it has
been observed that entrepreneurs sometimes voluntarily dissolve their businesses.
Although new firms exit the market in such different ways, all forms of exit are
regarded as homogeneous in the existing literature. However, it is possible that theeffects of factors affecting each form of exit offset between forms of exit; therefore,
ignoring heterogeneity between forms of exit would yield incorrect interpretations.
To provide a better understanding of industry dynamics, including entry and exit,
we explore heterogeneous exits—bankruptcy, voluntary liquidation, and merger—byfocusing on new firms. In particular, we examine empirically how factors affecting
new-firm exit vary across the forms of exit.
It is well recognized that new small-sized firms play a key role in innovation(e.g., Acs and Audretsch, 1990). New entrants not only promote innovation, butalso create opportunities for employment. In addition, they are expected to intensify
vigorous competition in industries, which can stimulate economic growth. In thisrespect, promoting new entry is fairly important from the perspective of economic
policy. On the other hand, it is well known that new firms tend to face difficulties
because of fewer resources and inexperience. In fact, some new firms are likely toexit the market within a few years. Other things being equal, new firms are more
likely to exit from competitive industries than from uncompetitive industries. Moreprecisely, bankruptcy resulting from failure tends to occur in competitive industries,
although it is inconclusive that other forms of exit, which do not necessarily indicate

2failure, tend to occur in such industries. To understand the survival and exit of new
firms more accurately, we provide new evidence on how the determinants of new-firm
exit vary according to forms of exit.
In this paper, we examine the effects of industry-, region-, firm- and entrepreneurspecific characteristics on new-firm exit according to forms of exit, which tend tobe ignored in the previous literature. In the analysis, we use a sample of firms
founded in Japan during 1997–2004 and estimate a competing risks proportional
hazards model. We provide evidence that the determinants of exit vary significantly
between forms of exit and argue that taking into account the forms of exit is fairly
important in the study on the determinants of exit.
The remainder of the paper is organized as follows. In Section 2, we describe
the background and related literature of this paper. Section 3 explains the data
and method employed in the analysis. Our model of the determinants of exit isdiscussed in Section 4. The empirical results are presented in Section 5. The final
section includes some concluding remarks.

2.

Background and related literature

In the field of industrial organization, scholars have realized that entry and exit
play an essential role in industry dynamics. Entry and exit, which are often regarded as ‘turbulence’ in the market, are vital to maintaining vigorous competition
in industries. In fact, a large number of empirical studies have provided insights
into the determinants of entry and exit; for example, Dunne et al. (1988) showed
the patterns of entry and exit over time in US manufacturing industries.1 Among1

For a survey of evidence on entry and exit, see, for example, Siegfried and Evans (1994), Carree(2006), and Santarelli and Vivarelli (2007). For more discussions on entry and exit, see also Geroski(1995) and Caves (1998).

3new firms, some firms survive and grow in the market through the learning process.
Because new firms are expected to contribute to the development of industries, it
is beneficial to promote the creation of new firms with growth potential. On theother hand, some firms are forced to exit under competitive pressure. Entry and exit
play a key role in maintaining the natural selection mechanism through competition,
which is required to achieve economic efficiency in industries.
Much attention has been paid to the post-entry performance of new firms as
a way to assess the competitive process in markets. The survival and exit of new
firms have been addressed in a rich stream of literature. To date, a large numberof empirical studies have examined the survival and exit of firms during the startup period. Audretsch (1991), for example, estimated the determinants of 10-year
survival rates for new establishments, using a logit model. Wagner (1994) also
examined the survival of new firms and the duration of survival in years, using
a probit model and a tobit model, respectively. Audretsch and Mahmood (1991,
1995) applied a proportional hazards model proposed by Cox (1972) (PH model,
henceforth) to analyze the survival and exit of new establishments and firms. The
PH model has several advantages over binary choice models such as the logit andprobit models, because the PH model takes into account the duration of firm survival
and censoring of observations. Given that post-entry performance depends on firms’
life cycles, the PH model based on firms’ age is more suitable. By using the PHmodel, we can utilize not only information on whether the firm exits but also thetime at which the firm exits. Mata and Portugal (1994) and Mata et al. (1995) used
the PH model to estimate the determinants of survival of new firms and plants in
Portugal. Honjo (2000a) also investigated the determinants of business failure of4new firms in Japan, excluding other forms of exit.2
Although it is worthwhile to understand what factors have more influence on
the survival and exit of new firms, the previous studies tend to treat all forms ofexit as homogeneous. As Parker (2009) pointed out, entrepreneurs close businesses
for a variety of reasons, and there are economic differences between forms of exit.
Ignoring heterogeneity between the forms of exit may yield incorrect interpretationsof the factors leading to the survival and exit of firms. Nevertheless, research that
focuses on different forms of exit for new firms has been quite scarce until now, partly
because of data unavailability. We therefore estimate the determinants of new-firm
exit by distinguishing bankruptcy, regarded as unsuccessful exit, from other formsof exit, including merger. In this respect, we provide new evidence on how factors
affecting new-firm exit vary across the forms of exit.
To date, much literature have highlighted firm-specific characteristics as factors
affecting post-entry performance.3 Some studies have examined whether firm size
and age affect post-entry performance (e.g., Evans, 1987). While firm-specific characteristics do have an impact on survival and exit, it can be useful for policy makers
to investigate how the survival and exit of new firms depend on industry-specificcharacteristics. Given that economic efficiency and allocation are achieved in thecompetitive process, it is hoped that entry and exit occur smoothly. However, when2
For Japan, Doi (1999) examined the determinants of firm exit at the industry level. Harada(2007) also examined the determinants of small-firm exit in Japan, by distinguishing between
economic-forced exit and non-economic-forced exit.
3
With respect to the determinants of exit, some studies have highlighted the effects of financial
conditions on the survival and exit of firms (e.g., Evans and Jovanovic, 1989). Even if a new firm has
growth potential, the firm cannot necessarily secure sufficient funds from external capital markets
because of a lack of business history. This is because, as Berger and Udell (1998) argued, new firms
are arguably the most informationally opaque, and adverse selection and moral hazard problems due
to information asymmetries hinder external financing of the firms’ activities. Although the effectsof financial conditions may provide interesting insights into financial strategies, this paper does not
examine the effects of financial conditions mainly because we did not obtain financial statements.

5

an entrepreneur intends to enter or exit a market, this behavior may be influenced
by barriers to entry and exit, associated with industry-specific characteristics. To
shed light on the competitive process, we assess whether and how the probability ofexit of new firms differs across industries. In addition to industry-specific characteristics, some recent studies have found that regional factors, such as agglomeration,
matter in the post-entry performance of new firms (e.g., Fritsch et al., 2006; Falck,2007). Compared with established firms, new firms are more vulnerable to environmental factors, including industry- and regional-specific characteristics. Exploring
how these environments shape each form of exit of new firms will provide us withinsights into industry dynamics.
Furthermore, the role of entrepreneurs’ human capital in new firms has beenemphasized in the literature.4 It has often been argued that entrepreneurs’ humancapital is a valuable resource for new firms, and plays a critical role in firms’ performance, mainly because new firms tend to have fewer resources and lack experience(e.g., Colombo and Grilli, 2005). In practice, a number of studies have provided
evidence that entrepreneurs’ human capital significantly affects the post-entry performance of new firms. Presumably, entrepreneurs’ human capital relates to firms’
resources and decisions—especially during the start-up period. Until now, however, there has been quite limited evidence on how entrepreneurial factors affecting
new-firm exit vary according to forms of exit. Using data on entrepreneur-specificcharacteristics, we thus estimate the determinants of exit, according to the forms of
4
Several studies have examined entrepreneurial exit from self-employment; these studies estimated the determinants of entrepreneurs’ self-employment duration by distinguishing between
failure and a transition to alternative employment (e.g., Taylor, 1999; Cueto and Mato, 2006). In
fact, as mentioned above, entrepreneurs close their businesses for a variety of reasons, and somevoluntarily dissolve their businesses. As Parker (2009) pointed out, entrepreneurs may plan to exit
within a predetermined time to harvest their investment.

6exit.
As mentioned above, there are different forms of exit, and the determinants ofnew-firm exit are considered to vary according to forms of exit. In practice, several
studies, although not focusing on new firms, have addressed the different forms ofexit. Schary (1991) highlighted three forms of exit, merger, voluntary liquidation,and bankruptcy, using data on 61 firms in the cotton textile industry of New England. Harhoff et al. (1998) distinguished between two forms of exit, bankruptcy andvoluntary liquidation, and estimated the determinants of exits, using a sample offirms in West Germany. These studies emphasized that firms exit the market inseveral ways and that each form of exit is likely to be caused by different factors.
Harhoff et al. (1998), for example, found that the owner’s age affects the probabilityof voluntary liquidation, but it does not affect that of bankruptcy. However, theirfindings tend to be limited to relatively large established firms, rather than smallsized new firms. As Evans (1987) indicated, the survival and exit of firms depends
heavily on firms’ age, and the performance of firms with a long history differs considerably from that of new firms. Therefore, research that focuses only on new firms
is required to clarify the differences of determinants between the forms of exit.
Esteve-Pérez et al. (2009) estimated the determinants of different forms of exit,
liquidation and acquisition. They examined the duration of firms, regardless ofwhen these firms entered the market, using a competing risks proportional hazards
model (henceforth, CPH model), which is explained below.5 As repeatedly argued,
5
We point out that these studies have faced a left-truncation problem in their samples. Even
though Esteve-Pérez et al. estimated the duration of firms using the CPH model, a left-truncation
problem arises because their sample includes firms for which life duration cannot be traced in theobservation period. To avoid the left-truncation problem, the sample should be restricted to firmsthat can be observed from their starting point. In addition, previous studies taking into accountthe forms of exit have not distinguished between the three forms of exit—bankruptcy, voluntaryliquidation, and merger.

7

entrepreneurs close businesses for a variety of reasons, and there are economic differences between the forms of exit. To better understand the post-entry performanceof new firms from the perspective of industry dynamics, it is necessary to take into
account the different forms of exit. Following Esteve-Pérez et al., we apply the CPH
model to the post-entry performance of new firms, since the duration of survival
is censored. Using a comprehensive data set of new firms in Japan, we examine
the effects of industry-, region-, firm-, and entrepreneur-specific characteristics on
new-firm exit. By doing so, we provide new evidence on how the determinants ofnew-firm exit vary according to forms of exit.

3.

Data and method

3.1.

Data sources

The data set employed in this paper comes from the TSR Data Bank compiled by
Tokyo Shoko Research (TSR), which is one of the major credit investigation companies in Japan. As a public data source, for example, the Establishment and Enterprise Census reports the numbers of entrants and exits, based on establishments,
in each industry or region. However, it is quite difficult to obtain individual datafrom public data sources, and, in general, we cannot identify which establishment(or firm) is active or extinct using these sources. In addition, when these sources
are used, there is the possibility that the relocation of an establishment to anotherregion is regarded as an exit even though the establishment remains in the market.
Consequently, when using these sources, we face difficulties identifying whether thefirm really has exited the market. On the other hand, the TSR Data Bank provides
information not only on whether the firm exits but also on which form the exit takes.

8

By using the TSR Data Bank, we are able to determine whether the firm exits themarket.
The data set consists of manufacturing firms founded between 1997 and 2004,
and includes information on the survival and exit of these firms up to 2009. Using
information on the form of exits, provided by the TSR Data Bank, we classify
exits into three forms: bankruptcy, voluntary liquidation, and merger. The TSR
Data Bank also provides data on firm-specific characteristics, such as legal forms
and the number of employees, in addition to information indicating whether or not
the firm has survived. Moreover, this source provides data on entrepreneur-specificcharacteristics, including date of birth and educational background.
Regarding industry-specific characteristics, data on capital intensity, price–cost
margins, and industry growth at the three-digit Standard Industrial Classification(SIC) level in each industry are obtained from the Report by Industry, Census of
Manufactures compiled by the Ministry of Economy, Trade, and Industry (METI).6
Data on research and development (R&D) intensity at roughly the three-digit SIC
level are taken from the Results of Basic Survey of Japanese Business Structure andActivities by the METI. In addition, data on gross entry rate at the three-digit SIC
level are obtained from the Establishment and Enterprise Census published by the
Ministry of Internal Affairs and Communications (MIC).7
6

Unfortunately, industrial classifications changed during the observation period, and for several
industries, we could not match the classifications at the three-digit SIC level between the periods
before and after the changes in the SIC. For these industries, we used data at the two-digit SIC
level, instead of the three-digit SIC level. In addition, when data were not available for a year at
the three-digit SIC level, because data were concealed for reasons of confidentiality, we used instead
the average values for these industries in other years during the observation period or values at thetwo-digit SIC level.
7
The Establishment and Enterprise Census surveys gross entry rates every three or five years.
Therefore, we used the values of gross entry rates between 1996 and 2001 divided by five for firms
founded during the period 1997 to 2001 and the values of gross entry rate between 2001 and 2004
divided by three for firms founded during the period 2002 to 2004.

9

With respect to region-specific characteristics, we obtain data on the numberof establishments for the two-digit SIC level at the prefecture level from the Establishment and Enterprise Census.8 As for regional economic conditions, we use dataon the annual unemployment rate in each prefecture from the Labor Force Surveyof the MIC.

3.2.

Different forms of exit

As explained above, we classify exits into three forms—bankruptcy, voluntary liquidation, and merger—using the classifications in the TSR Data Bank. In this paper,‘bankruptcy’ indicates the situation in which firms cannot repay their debts and thus
cease operations. The bankruptcy group includes those firms applying for court
protection under the Bankruptcy Law, as well as those applying for it under the
Corporate Rehabilitation Law, and the Civil Rehabilitation Law enacted in Japanin April 2000. In addition, firms whose bills payable are no longer honored by banks
are regarded as bankrupt even if they are not necessarily judged as bankrupt by acourt. That is, the bankruptcy group, in this paper, includes not only firms legallydeclared as bankrupt but also firms that are inactive from an economic viewpoint.
By contrast, ‘voluntary liquidation’ indicates the situation in which solvent
firms voluntarily dissolve their businesses. There may be several reasons for voluntary liquidation, although it can be difficult to precisely define the reasons. Some
entrepreneurs may want to dissolve their businesses before facing insolvency, because they recognize that their businesses are no longer going well. In addition,
those who have the opportunity to receive higher wages as an employee may tend
8
Because the values of the number of establishments at the two-digit SIC level are available for1996 and 2001, we used the values in 1996 for firms founded during the period 1997 to 2000 andthe values in 2001 for firms founded during the period 2001 to 2004.

10

to voluntarily dissolve their businesses. Other entrepreneurs may be forced to close
their businesses because they are approaching retirement age and cannot find any
successors.
Finally, ‘merger’ indicates the situation in which a firm disappears because ofmerger with another firm.9 Merger does not mean business failure; that is, it does
not necessarily indicate poor performance. Rather, merging firms and investors pay
attention to firms that have capabilities or valuable resources. From this viewpoint,
firms with growth potential may become merger targets. Besides, the rational selfinterest of some entrepreneurs may be served by selling their firms, rather than bycontinuing to run their firms. If entrepreneurs expect high capital gains by selling
their firms, they are likely to take the exit strategy to collect funds for their next
investment. In this respect, merger appears to be a fairly different economic eventfrom other forms of exit such as bankruptcy.
However, a problem arises when we identify the forms and timing of exit using
the TSR Data Bank, as the month and year of exit for voluntary liquidation andmerger cannot be identified in the data source. In addition, the month and year ofexit for a few bankruptcies—firms with a total deficit of less than 10 million yen—cannot be identified, although the month and year of exit for most bankruptcies
are available in the data source. However, according to TSR, researchers from TSR
collect and maintain firms’ information by telephone, postal questionnaire, and fieldsurveys several times a year. If a firm is found to exit, the firm’s information is nolonger updated. Therefore, using information on the accounting period when thelast statement of accounts before exit was reported, we identify the year of exit for9

As mentioned above, merged firms are regarded as exiting, but merging firms, that is, the firmsthat absorb the merged firms, are not regarded as exiting in this paper, because these firms still
exist in the market.

11firms that have exited because of voluntary liquidation or merger, including those
few bankruptcies of firms with a total deficit of less than 10 million yen. For thesefirms, the year when the final statement of account was reported is regarded as theyear of exit, and we analyze yearly data from 1997 to 2004.10

3.3.

MethodOur interest is to estimate the probability that a new firm will exit at a certain age
and to identify factors affecting the three forms of exit. However, some firms do
not exit during the observation period; that is, duration is right censored. For thisreason, previous literature has applied the PH model to the survival and exit of new
establishments or firms over time (e.g., Audretsch and Mahmood, 1991, 1995; Mataet al., 1995; Honjo, 2000a). As already mentioned, the PH model has advantages
because it can accommodate the right-censored observations.
In this paper, the post-entry performance of new firms is divided into survival
and, as discussed above, the three forms of exit: bankruptcy, voluntary liquidation,and merger. Schary (1991) assumed, although her analysis did not focus on newfirms, that the forms of exit are inherently ordered as follows: survival, merger,
nonfailure, and failure. However, it cannot be reasonably assumed that this orderholds for all situations. In addition, because there are three forms of exit in our dataset, the occurrence of one of these forms precludes us from observing another formof exit. For example, once a firm exits the market by merger, the duration until
10

However, this conjecture of the year of exit may still have a bias. Therefore, we predicted
the year of exit for all forms of exit, including for firms with a total deficit greater than or equal
to 10 million yen, based on the year of the last reported statement of account and estimated thedeterminants of exit using the CPH model, which is explained below. As a result, we did not findlarge changes in our estimation results, regardless of the prediction methods for the year of exit.
Instead of the CPH model, we also used a multinomial logit model as a robustness check. The
results were generally consistent with those reported in Section 5.

12

bankruptcy or voluntary liquidation cannot be traced. For this reason, Esteve-Pérez
et al. (2009) proposed to use the CPH model to identify factors affecting each formof exit. The CPH model has been used to deal with the presence of competing events
that impede the event of interest.11 Following Esteve-Pérez et al., we use the CPH
model to estimate the determinants of exit among new firms.12
Suppose that firm i is at risk of m different forms of exit. In this paper, weconsider three forms of exit—bankruptcy, voluntary liquidation, and merger—that
is, m = 3. Let xij denote a vector of covariates affecting form j(= 1, . . . , m) of exit.
In the CPH model, the hazard function, λij , at time t is assumed to be written as:
λij (t) = λ0j (t) exp (xij βj ) ,(1)

where both λ0j (t), which is called the baseline hazard function, and βj (vector) are
specific to form j hazard. Suppose that kj refers to the number of firms that exit
by form j (e.g., bankruptcy) during the observation period. Let tj1 , . . . , tjkj denotethe kj ordered exits of form j. The partial likelihood function of form j for the CPH
model, Lj , is given by:
kj

kj
Y

Y
exp (xjh βj )λ0j (t) exp (xjh βj )
P
P
=
,
Lj =
l∈R(tjh ) λ0j (t) exp (xl βj )l∈R(tjh ) exp (xl βj )
h=1
h=1

(2)

where R(tjh ) is the set of firms at risk of exit at time tjh . By maximizing thelogarithm of the likelihood function, we obtain the estimated results for form j.
Because it is considered that the probability of exit depends heavily on the firm’s
life-cycle stage, time is measured by firm age in this paper. That is, t corresponds to
11

For more details on the CPH model, see, for example, Cameron and Trivedi (2005).
Esteve-Pérez et al. emphasized that the presence of left-truncated observations—firms thatstarted businesses before the beginning of the observation period—is not a problem. However, if
the determinants of exit depend on the firm’s age, the left truncation would be problematic. In
contrast to their analysis, we can avoid the left-truncation problem, because we focus only on newfirms, which results in the identification of the starting year of the firms in our data set.
12

13

the number of years after the firm starts a business and the baseline hazard controls
for the risk to all firms of the same age.13 However, not all the firms in our data set
were necessarily founded in the same year; that is, entry years differ between firms.
As new firms may face different macroeconomic conditions related to the year ofentry, we will control for entry-year cohorts in the model. In the following section,
we explain the vector of covariates, xij , in our model.

4.

Determinants of exit

As repeatedly explained, we explore heterogeneity in the determinants of exit of
new firms. More specifically, we examine empirically how factors affecting the exitof new firms vary across bankruptcy, voluntary liquidation, and merger. We discuss
industry-, region-, firm-, and entrepreneur-specific characteristics that affect the exitof new firms and present independent variables as the determinants of exit.
As for industry-specific characteristics, we first examine the effect of capitalintensity on each form of exit. As is often argued, capital intensity may be likely
to be associated with sunk costs (e.g., Cabral, 1995). If new firms are required toestablish and operate large-sized plants and machines specific to an industry, which
tend to be thus sunk, they are more likely to face larger exit barriers. In capitalintensive industries, if most of capitals, such as plants and machines, are sunk costs,
new firms are less likely to exit than those in labor-intensive industries.14 However,firms in capital-intensive industries may have more salable resources, such as physical13

In our data set, there are several cases in which entry and exit occurred in the same year. Following some previous studies (e.g., Thompson, 2005), therefore, the duration of survival is measured
by the firm’s age plus 0.5, in order to avoid simultaneous entry and exit.
14
In addition, capital intensity is closely associated with scale economies, which increase the costdisadvantage and therefore the exposure to risk confronting a new establishment (Audretsch and
Mahmood, 1995).

14

facilities and real estate, compared with those in labor-intensive industries. In thisrespect, new firms in capital-intensive industries may have lower barriers to exit.
More specifically, in capital-intensive industries, while entrepreneurs may be able
to avoid going bankrupt by selling the salable resources, they may prefer dissolving
voluntarily the businesses and sell the firms to another firm before going bankrupt.
In these respects, the effects of capital intensity on exit are likely to vary acrossforms of exit. In this paper, industry’s capital intensity (CAP ) is defined as theratio of physical fixed assets to shipments in the year of entry.
We also expect research and development (R&D) intensity to be fairly important in determining the probability of exit. Esteve-Pérez et al. (2009) argued
that new firms entering the market in R&D-intensive industries usually enjoy hightechnological opportunities but also face higher uncertainty regarding both the technological characteristics of new products and their demand. Lin and Huang (2008)
argued that a higher R&D intensity implies greater innovation opportunities for theindustry, and provides better conditions for the entry and survival of new firms. In
practice, Lin and Huang found that the probability of survival tends to be higher
in R&D-intensive industries than in less R&D-intensive industries. On the other
hand, Siegfried and Evans (1994, p. 140), argue that R&D intensity may function
as a structural barrier to entry because, when R&D is important, potential entrants
may not be able to afford the high initial capitalization required for successful entry.
Large incumbents may also use entry-deterring strategies using R&D investment(e.g., Smiley, 1988; Bunch and Smiley, 1992). In addition, Shapiro and Khemani(1987) found that high research intensity associated with sunk costs deters exit,
although it does not deter entry. We therefore expect that R&D intensity has a neg-15

ative effect on the occurrence of bankruptcy. The variable for an industry’s R&D
intensity (RD) is defined as the ratio of R&D expenditures to sales in the year ofentry.
We also include a variable for average price–cost margins (P CM ). Exit isusually likely to occur because of low profitability. In practice, some studies founda negative effect of industry’s profits on exit (e.g., Shapiro and Khemani, 1987). It
is predicted that price–cost margins have a negative influence on the probability ofexit regardless of the form of exit. The variable for an industry’s price–cost margin
is defined as the value of shipments minus labor and material costs, divided by thevalue of shipments in the year of entry.
Industry growth is also included in the model. Higher industry growth is expected to give a better environment in which new firms can survive and grow. On
the other hand, high growth may lead to further investments and therefore fierce
competition. In this respect, the risk of exit may be as high as the chance of success. The variable for industry growth (IG) is defined as the difference of shipments
between the year of entry and the preceding year, divided by the value of shipmentsin the preceding year. Moreover, an industry’s entry rate may affect the probabilityof exit.15 It is well known that entry and exit are positively correlated with eachother (e.g., Geroski, 1995). Geroski et al. (2010) found that, in practice, entry rates
at founding persistently decrease the probability of survival. An industry’s grossentry rate (EN T RY ) is defined as the number of new establishments, divided by
15
Entry may be closely associated with other industry-specific characteristics. As is often argued,
new entry may be more likely to occur in industries with high price-cost margins. High industry
growth may also lead to further entry. In practice, the variable for entry (EN T RY ) has positive
correlations with price cost-margins (P CM ) (r = 0.149) and industry growth (IG) (r = 0.136).
While we estimated the model by dropping the variable for entry, the estimation results did notchange significantly.

16

the number of existing establishments.16
In addition to industry-specific characteristics, we examine the effects of regionspecific characteristics on exit. A number of studies have examined how regional factors affect the survival and exit of new firms. In particular, there have been contradictory arguments about the impact of regional agglomeration (or concentration) on
survival. Positive arguments suggest that high regional agglomeration leads to easy
access to suppliers or customers and favors knowledge spillovers from other firms.
On the other hand, negative arguments maintain that increases in regional agglomeration tend to be associated with fierce competition within regions and therefore
lead to higher probability of exit of firms. For example, Strotmann (2007) examinedthe determinants of survival of new German firms and found that agglomeration
negatively affects the probability of survival. For Japan, Honjo (2000b) found that
regional agglomeration increases the probability of failure of new software firms.
By contrast, Fotopoulos and Louri (2000a) examined the difference in the probability of survival of Greek firms between urban and rural areas, and found that new
firms tend to survive in urban areas. In this paper, we examine the effect on theexit of new firms of regional agglomeration (AGGLOM ), defined as the numberof establishments by the two-digit SIC level per square kilometer at the prefecturelevel.
The effect of the variable for unemployment rate (U N EM P ) is also examined
to control for regional economic conditions.17 Unemployment rate has often been
16

For more details on the construction of this variable, see footnote 7.
The effect of population growth was estimated to control for regional demand. A number ofstudies have found that population growth is an important determinant in new-firm survival. Acs etal. (2007) argued that high population growth regions are attractive for doing business, because thegrowth may enable firms to expand their businesses or create new businesses. However, because of
the correlation between this variable and other variables, we do not report results for this variable.
17

17

used as a measure of economic distress in regions (e.g., Storey, 1994; Acs et al.,2007). As is often argued, a higher unemployment rate may indicate lower levels of
demand in regions. We expect the unemployment rate would negatively affect theperformance of region-specific businesses, and thus new firms in regions with higher
unemployment rates may be more likely to be forced to exit. On the other hand,
Brixy and Grotz (2007) argue that an unfavorable labor market is associated withlow opportunity costs because of a lack of alternatives. Therefore, it is predicted that
entrepreneurs are less likely to dissolve their businesses voluntarily in economically
distressed regions, because they do not have any other employment option. The
variable for unemployment rate is calculated as the ratio of the unemployed to thelabor force in each prefecture.
With respect to firm-specific characteristics, the effect of firm size is examined
as a determinant of exit.18 A large number of studies have provided evidence thatthe probability of survival increases with firm size (e.g., Audretsch, 1991; Audretsch
and Mahmood, 1991; Audretsch and Mahmood, 1995; Honjo, 2000a, Honjo, 2000b).
Previous literature suggests a number of reasons that larger firms are more likely tosurvive than smaller firms. Audretsch and Mahmood (1995) argued that larger firms
may be more likely to be closer to the minimum efficient scale to operate efficiently
in a market, and are therefore less likely to be vulnerable than smaller firms that
operate further up the cost curve. Fazzari et al. (1988) argued that large and small
firms have different access to funds, and small firms have more limited access toexternal finance than do large firms. Geroski et al. (2010) also pointed out thatlarger firms may be more efficient than smaller firms, not because they operate at
18

It should be noted that data on the number of employees are not measured at the year of entry,
because the TSR Data Bank provides only the latest information on the number of employees.

18

a different point on the cost curve, but because they may have different managerial
capabilities. That is, a firm’s size may be a consequence of its capabilities.
The effect of this variable may vary between the different forms of exit. Harhoff
et al. (1998) suggest that because the exit mechanism of insolvency is not profitablefor firms below some minimum size and an insolvency procedure involves high transaction costs, debtors and creditors may prefer less formal agreements, such as voluntary liquidation. For this reason, smaller firms may tend to exit through voluntaryliquidation rather than through bankruptcy. On the other hand, large firms may
have larger exit barriers than small firms, because the bankruptcy of a large firm has
an impact on many stakeholders, which may lead to an increase in unemployment.
Therefore, a larger distressed firm might prefer to find a rescuer who can buy thefirm rather than liquidate themselves. In this paper, the number of employees is ourmeasure of firm size.19 In our analysis, taking into account the nonlinear relationshipbetween firm size and exit, we use several dummies for size classes in terms of thenumber of employees: 1–4 employees (reference), 5–9 employees (SIZE_5-9), 10–19
employees (SIZE_10-19), 20 employees and more (SIZE_20). A dummy variable
for joint stock companies (JST OCK) is also included to control for differences inlegal forms of new firms.20
Regarding entrepreneur-specific characteristics, we examine the effects of educational background as a determinant of exit of new firms. As already discussed,
some studies emphasize that entrepreneurs’ human capital plays an important role19
We also used data on paid-up capital as a measure of firm size. Compared with total assets,paid-up capital does not include liabilities or retained profits. While total assets may be moresuitable to represent the firm’s asset size, total assets include liabilities and large liabilities increase
the probability of bankruptcy. However, as paid-up capital was closely correlated to other variables,such as the dummy for joint stock companies, we do not report the results for paid-up capital.
20
However, we regard this variable simply as a control variable, because our sample mainly consistsof joint stock companies (52.8%). Therefore, we may not be able to provide a conclusive answer on
this variable.

19

in firm survival. Bates (1990) found that entrepreneurs’ human capital inputs affectsmall business longevity, and Cressy (1996) argued that human capital is the true
determinant of firm survival. The effect of educational background may also vary
between the different forms of exit. It is particularly expected that while firms withhighly educated entrepreneurs are less likely to go bankrupt, large firms may tend todisappear by merger because of their superior resources. On the other hand, it is often argued that because highly educated people tend to have alternative employment
opportunities and receive a large number of job offers, they are more likely to moveto alternative employment (e.g., Gimeno et al. 1997; Taylor, 1999). The variable foreducational background is defined as a dummy variable indicating the value of one if
the entrepreneur has a university education (EDU _U N IV ). However, because theentrepreneur’s educational background is unknown for some observations in our dataset, a dummy variable for those firms (EDU _X) is also included in the model. The
effect of the entrepreneur’s age when the entrepreneur started the business is examined in the model. When some entrepreneurs are approaching retirement age andcannot find a successor, they may be more likely to close their companies voluntarily.
In our analysis, we use several dummy variables for age classes: less than 30 years
old (reference), 30–39 years old (AGE_30-39), 40–49 years old (AGE_40-49), 50–59
years old (AGE_50-59), 60 years old and more (AGE_60). If the entrepreneur’s age
is unknown, a dummy variable (AGE_X) is used.
These independent variables are measured as time-constant covariates. In otherwords, it is assumed that these do not change from the year of entry to the occurrenceof exit. Whereas time-constant variables do not carry information about the state ofthe dependent process, time-varying variables may be subject to reverse causation

20

(e.g. Kalbfleisch and Prentice, 2002; Blossfeld et al., 2007). Using these independent
variables, we explore the determinants of exit of new firms according to forms of
exit—bankruptcy, voluntary liquidation, and merger.

5.

Results

5.1.

Descriptive statistics

Our sample consists of 15,841 manufacturing firms founded in Japan during 1997–
2004, with data until 2009. Table 1 presents summary statistics for three forms ofexit by year of entry. An important fact, although not surprising, is that new firms
indeed exit the market in different ways. As shown in Table 1, 717 (4.5%) of the
15,841 firms in the sample exited the market through bankruptcy. A total of 1,280
firms (8.1%) voluntarily closed their businesses and 442 firms (2.8%) disappeared
because of merger. Therefore, the total number of exited firms in the sample is 2,439(15.4%).
Table 2 shows summary statistics for the forms of exit by sector. A clear finding is that the exit ratios differ considerably between sectors. For example, in thebeverage and feed sector, the exit rate for each form is lower than the mean rate of
all industries. On the other hand, as shown in Table 2, in the information and communication electronics equipment sector, the exit rate for all forms of exit (21.5%)
is highest, and the exit rate for each form of exit is higher than the means of allindustries. These facts suggest that industry-specific characteristics are importantfactors in determining the exit of new firms.
Another finding is that the exit ratio varies across the forms of exit even within
an industry. In the textiles sector, for example, 79 (6.6%) and 120 (10.0%) of21

the 1,203 firms in the sample went bankrupt and voluntarily closed the business,
respectively. The exit ratios by bankruptcy and by voluntary liquidation in thisindustry are higher than the means of all industries. By contrast, 27 (2.2%) of the
1,203 firms disappeared because of merger; this exit ratio is less than the meansof all industries. These statistics suggest the presence of heterogeneities in thedeterminants of exit across bankruptcy, voluntary liquidation, and merger.

5.2.

Estimation results

Using the CPH model, we estimate the determinants of exit according to forms ofexit. The definition of the variables and descriptive statistics are shown in Tables 3
and 4, respectively. Table 5 shows the estimation results by forms of exit. Column(i) of Table 5 shows the results using a pooled sample of all forms of exit, in order
to compare the pooled results with each form of exit separately. In Column (i) of
Table 5, the industry’s price–cost margins (P CM ) and gross entry rate (EN T RY )have significantly negative and positive effects on the hazards of the pooled exit,
respectively. However, other independent industry-specific characteristics have nosignificant effects on the hazards of exit. Region-specific characteristics have no significant effects on the hazards of exit in Column (i) of Table 5. With respect tofirm-specific characteristics, SIZE_5-9 and SIZE_10-19 have negative and significant effects on the hazards of pooled exit, although the effect of SIZE_20 is not
significant. This suggests that there is a nonlinear relationship between firm sizeand exit. The dummy variable for joint stock companies (JST OCK) has a significantly positive effect, although this is simply included as a control variable. As forentrepreneur-specific characteristics, the variables for educational background andage have significant effects on the pooled exit results, indicating that firms whose22entrepreneurs had a university education and were approaching retirement age weremore likely to exit.
Columns (ii)–(iv) of Table 5 show the estimation results for the determinantsof exit of new firms by forms of exit. The variable for capital intensity (CAP ), as
shown in Column (ii) of Table 5, has negative and significant effects on exit throughbankruptcy. This result indicates that new firms tend to survive longer in capitalintensive industries. On the other hand, Columns (iii)–(iv) of Table 5 indicatethat CAP has positive and significant effects on voluntary liquidation and merger,
suggesting that new firms are more likely to exit through voluntary liquidationand merger in industries characterized by large amounts of capital. These results
may suggest that because firms in capital-intensive industries may have more salable
resources, they can avoid bankruptcy by selling the resources and dissolve businesses
via voluntary liquidation or merger rather than bankruptcy using a legal procedure.
R&D intensity (RD) also has negative and significant effects on the hazards ofbankruptcy in Column (ii) of Table 5. This result supports the sunk-cost explanation, which is consistent with some previous studies, including Shapiro and Khemani(1987). On the other hand, RD has no significant effect on exit through voluntaryliquidation or merger, as shown in Columns (iii) and (iv) of Table 5.
Price–cost margin (P CM ) has a negative effect on exit in all the models ofTable 5, although the effect on bankruptcy is not significant in Column (ii). This
result suggests that low profits are likely to lead to exit. This is also consistent
with the result of Shapiro and Khemani (1987). Given that high price–cost margins
represent the absence of competitive pressure, our result indicates that new firms
are less likely to exit in industries lacking competitive pressure.

23

As shown in Table 5, although we expected that industry growth (IG) would
have significant effects on exit, we did not find any significant effects. This is,however, consistent with the result of Audretsch and Mahmood (1995). As alreadydiscussed, while higher growth is expected to give a better environment in which
new firms can survive and grow, it may lead to further investments and therefore
fierce competition. The risk of failure may be as high as the chance of success, andthis may be one of the reasons that we do not find any significant results for industry
growth. Industry’s gross entry rate (EN T RY ) indicates positive signs in all modelsof Table 5. Our findings suggest that higher entry rates at founding decrease theprobability of survival. This is consistent with the finding of Geroski et al. (2010).
Regarding region-specific characteristics, regional agglomeration (AGGLOM )has a positive and significant effect on exit through bankruptcy, as indicated inColumn (ii) of Table 5. This result suggests that bankruptcy is more likely in competitive areas than in uncompetitive areas. As discussed above, while many studies
have provided contradictory evidence on the impact of regional density, our result
supports the negative impact of agglomeration on the post-entry performance offirms. Our finding is also consistent with some empirical studies, including Strotmann (2007). On the other hand, this variable has a significantly negative effect onvoluntary liquidation. This supports the positive view of agglomeration.
Unemployment rate (U N EM P ) has a significantly positive effect on bankruptcy,
whereas it has a negative and significant effect on voluntary liquidation in Table 5.
As predicted, the result suggests that new firms are more likely to be forced into
bankruptcy in economically distressed regions. On the other hand, our result suggests that entrepreneurs might be less likely to close their businesses voluntarily in24economically distressed regions, because they do not have alternative employment
in such regions.
With respect to firm-specific characteristics, SIZE_5-9 and SIZE_10-19 havepositive and significant effects on bankruptcy in Column (ii) of Table 5. On theother hand, SIZE_5-9, SIZE_10-19, and SIZE_20 have negative and significant
effects on voluntary liquidation in Column (iii) of Table 5. Moreover, the effects
only of SIZE_10-19, and SIZE_20 are positive and significant in Column (iii) of
Table 5. As discussed, this result is consistent with the argument of Harhoff et al.
(1998) that the exit mechanism of insolvency is not profitable for firms below someminimum size and an insolvency procedure requires significant transactions costs,
debtors and creditors may prefer more informal agreements, such as voluntary liquidation. Therefore, small-sized firms are more likely to exit via voluntary liquidation
than via bankruptcy. Alternatively, our results provide evidence that large firms areless likely to close their businesses regardless of involuntary or voluntary liquidation.
The effect of joint stock companies (JST OCK) is positive and significant only in
Column (iv) of Table 5, although this variable was simply included as a control
variable.
The dummy variable for entrepreneur’s educational background, university
education (EDU _U N IV ), has a negative and significant effect on exit throughbankruptcy in Column (ii) of Table 5. This result indicates that firms with highly
educated entrepreneurs tend to survive better than others, suggesting that entrepreneurs’ human capital is fairly important for the survival of new firms. Thisis consistent with some previous studies, including Bates (1990), Cressy (1996) andHonjo (2000a). On the other hand, as shown in Column (iii) of Table 5, the dummy

25

variable for university education has a positive and significant effect on exit throughvoluntary liquidation and merger. This suggests that firms with highly educated entrepreneurs are more likely to exit the market via voluntary liquidation and merger.
The fact that firms with highly educated entrepreneurs are more likely to voluntarily close their companies is probably because highly educated entrepreneurs havegreater opportunities for alternative employment. This is consistent with Gimeno
et al. (1997) and Taylor (1999).
The entrepreneur’s age has no significant effect on bankruptcy, as shown inColumn (ii) of Table 5, while only AGE_50-59 and AGE_60 have positive andsignificant effects on voluntary liquidation, as in Column (iii) of Table 5. Thissuggests that when entrepreneurs are approaching retirement age, they are more
likely to voluntarily close their companies. This is consistent with some previous
studies, including Harhoff et al. (1998).

5.3.

Discussion

We have examined the determinants of new-firm exit by form of exit. Although,as shown in Table 5, the coefficients of several variables are insignificant for pooled
exit, some of these coefficients are significant for each form of exit. In particular,
capital intensity does not have significant effects on the probability of pooled exit,
but it has significantly different effects on bankruptcy, voluntary liquidation, andmerger. R&D intensity has insignificant effects on the probability of pooled exit,
while it has negative and significant effects on that of bankruptcy. This showsthat the probability of bankruptcy of new firms decreases in capital-intensive andR&D-intensive industries. However, when treating the three forms—bankruptcy,
voluntary liquidation, and merger—as pooled exit, we cannot detect any significant

26

effects of these characteristics on the exit of new firms, as shown in Column (i) of
Table 5. This suggests that the determinants vary according to the forms of exit,
and we thus emphasize that there are economic differences between the forms of exit.
Ignoring heterogeneity between the forms of exit may lead to critical effects on theexit of new firms being overlooked. To better understand the post-entry performanceof new firms, we can say that the forms of exit should be taken into account in theanalysis. Evaluating the determinants of exit of new firms more precisely would
contribute to the further development of research on industry dynamics.
As mentioned above, the creation of new firms is of particular interest foreconomic growth, especially in some developed countries, including Japan. In Japan,
the government has until the present day attempted to conduct support programs for
new firms. For example, the Creative Business Promotion Law was enacted in 1995
to enhance the capital investment of small and medium enterprises (SMEs). Haradaand Honjo (2005) and Honjo and Harada (2006) showed that the approval of this law
substantially increased SMEs’ new investments and promoted SMEs’ asset growth.
In addition, a tax concession for ‘angels’ (individual investors) was introduced in
1997 to stimulate new entry. These policies were expected to have contributed tothe creation of new firms during the recent recession period. However, according to
the 2008 White Papers on Small and Medium Enterprises in Japan, the number of
new firms did not increase after the so-called bubble economy of the late 1980s.
It has often been argued that Japanese domestic industry is characterized bylow metabolism and inefficient reallocations between incumbents and entrants. Somestudies have argued that the natural selection mechanism does not work well in periods of recession (e.g., Nishimura et al., 2005; Fukao and Kwon, 2006). However,27

these studies focused mainly on the behavior of established firms; hence, different
results might be obtained if the behavior of new firms was highlighted. Despite theimportance of entry and exit for the natural selection mechanism through competition, little attention has been paid to the post-entry performance of new firms inJapan.
The findings of this paper include several important implications. The results
show that bankruptcy is less likely to occur in industries with high capital intensity,whereas voluntary liquidation and merger are more likely to occur in capital-intensive
industries. This fact may suggest that factors of production tend to be reallocatedin the industries where the resources and firms are more salable. Also, the results
indicate that the variables associated with the intensity of market competition, suchas price–cost margin and gross entry rate, generally increase the probability of exitof new firms, after controlling for region-, firm- and entrepreneur-specific characteristics. Alternatively, the results imply that while entrepreneurs with high humancapital are less likely to go bankrupt, they have more opportunities to change theirjobs voluntarily or to be successfully acquired by other firms. These findings may
suggest that the natural selection mechanism through competition works smoothly
to some extent in Japanese manufacturing industries. In these respects, we suggestthat policy makers should pay more attention to industry dynamics, including entry and exit, and preserve the natural selection mechanism for the development ofindustries.

28

6.

Conclusions

This paper has explored heterogeneous exits—bankruptcy, voluntary liquidation,and merger—by focusing on new firms. Using a sample of approximately 16,000
firms founded in Japan from 1997 to 2004, we examined heterogeneities in the determinants of exit between different forms of exit up to 2009. Regarding industryspecific characteristics, our findings indicated that new firms in capital-intensive andR&D-intensive industries are less likely to go bankrupt. On the other hand, newfirms in industries characterized by high capital intensity and low price–cost margins
are more likely to exit via voluntary liquidation and merger. We also found thatgross entry rate had significantly positive effects on exit regardless of form of exit.
Region-specific characteristics, such as regional agglomeration and unemployment
rate, had significant effects on exit, and their effects vary between different forms ofexit. Moreover, we provided evidence that firm-specific characteristics, such as thenumber of employees, and entrepreneur-specific characteristics, such as educational
background and age, play significantly different roles in determining the rate of eachform of exit.
However, our paper has some limitations. While we have examined the determinants of exit of new firms, we could not include some variables, especially thosevariables associated with financial conditions. New firms are likely to face difficulties
in securing initial funds from external capital markets. Fotopoulos and Louri (2000b)
and Huynh et al. (2010), for example, provide evidence that initial financial conditions are important factors in determining the exit of new firms. As Buddelmeyer
et al. (2010) and Wagner and Cockburn (2010) found, intangible resources, suchas patents and trademarks, may also have an impact on firm survival. Therefore,29

it is worthwhile investigating heterogeneity across new firms, which may indicate
the capabilities and resources of new firms. In addition, it would be interesting
to extend this research to other industries because, for example, service industries
have recently attracted the attention of entrepreneurs, rather than manufacturingindustries. Despite the limitations of this study, we revealed heterogeneity in thedeterminants of exit across bankruptcy, voluntary liquidation, and merger; this has
not been examined in previous literature. Entry and exit are essential to industry
dynamics, and further investigation on this topic is warranted.

30

Acknowledgments
We wish to thank Sadao Nagaoka, Hiroyuki Odagiri, and Hiroyuki Okamuro for theirhelpful comments and advice. We also thank the participants at the CEI Seminarand IIR Summer School of Hitotsubashi University in Tokyo, the ERIM Seminar at
Erasmus University in Rotterdam, the EARIE Annual Conference in Istanbul, the
JEA Autumn Meeting in Hyogo, the CAED Conference in London, and the RENT
Annual Conference in Maastricht, in 2010, for their comments. In particular, weare grateful to Kim Huynh, Jose Maria Millan, and Masayuki Morikawa for theiruseful suggestions, which significantly improved the paper. Financial support fromthe Japan Society for the Promotion of Science (Grant-in-Aid for Young Scientists(B) (No. 2173186) for the first author, and Grant-in-Aid for Scientific Research (C)(No. 20530215) for the second author) is gratefully acknowledged. Needless to say,any remaining errors are our own.

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37

38

N (A)
2302
2285
2098
2297
1952
1654
1645
1608
15841

Pooled exit (B)
463
455
415
390
268
177
147
124
2439

Note: N indicates the number of observations.

Entry year
1997
1998
1999
2000
2001
2002
2003
2004
Total

(B/A)
20.1%
19.9%
19.8%
17.0%
13.7%
10.7%
8.9%
7.7%
15.4%

Forms of exit
Bankruptcy (C) (C/A) (%)
156
6.8%
144
6.3%
125
6.0%
110
4.8%
70
3.6%
46
2.8%
33
2.0%
33
2.1%
717
4.5%
Voluntary (D)
241
245
209
208
152
87
76
62
1280

Table 1: Summary statistics for the forms of exit by the year of entry.

(D/A) (%)
10.5%
10.7%
10.0%
9.1%
7.8%
5.3%
4.6%
3.9%
8.1%

Merger (E)
66
66
81
72
46
44
38
29
442

(E/A) (%)
2.9%
2.9%
3.9%
3.1%
2.4%
2.7%
2.3%
1.8%
2.8%

39

N (A)
1788
360
1203
309
301
260
762
732
50
755
154
146
665
181
170
1412
513
1611
540
681
875
452
507
1414
15841

Pooled exit (B)
298
43
226
62
39
50
100
102
5
105
17
21
110
29
34
172
81
214
70
135
138
97
63
228
2439

Note:
1. N indicates the number of observations.
2. IC indicates “information and communication”.

SectorFood
Beverage and feed
TextilesLumber and wood
Furniture and fixtures
Pulp and paper
Printing
ChemicalsPetroleum and coal
Plastics
Rubber
Leather and fur skins
Ceramic, stone, clay
Iron and steel
Non-ferrous metals
Fabricated metals
General-purpose machinery
Production machinery
Business oriented machinery
Electronic parts/devices
Electrical machinery
IC electronics equipment
Transportation machinery
Miscellaneous
Full sample

(B/A)
16.7%
11.9%
18.8%
20.1%
13.0%
19.2%
13.1%
13.9%
10.0%
13.9%
11.0%
14.4%
16.5%
16.0%
20.0%
12.2%
15.8%
13.3%
13.0%
19.8%
15.8%
21.5%
12.4%
16.1%
15.4%

Forms of exit
Bankruptcy (C) (C/A)
105
5.9%
13
3.6%
79
6.6%
23
7.4%
13
4.3%
8
3.1%
36
4.7%
27
3.7%
2
4.0%
25
3.3%
1
0.6%
10
6.8%
26
3.9%
5
2.8%
7
4.1%
61
4.3%
19
3.7%
63
3.9%
19
3.5%
30
4.4%
34
3.9%
30
6.6%
11
2.2%
70
5.0%
717
4.5%
Voluntary (D)
142
25
120
29
22
26
47
50
1
62
12
10
60
17
21
84
46
119
39
76
70
46
37
119
1280

Table 2: The number of new firms and exited firms by forms of exit.

(D/A)
7.9%
6.9%
10.0%
9.4%
7.3%
10.0%
6.2%
6.8%
2.0%
8.2%
7.8%
6.8%
9.0%
9.4%
12.4%
5.9%
9.0%
7.4%
7.2%
11.2%
8.0%
10.2%
7.3%
8.4%
8.1%

Merger (E)
51
5
27
10
4
16
17
25
2
18
4
1
24
7
6
27
16
32
12
29
34
21
15
39
442

(E/A)
2.9%
1.4%
2.2%
3.2%
1.3%
6.2%
2.2%
3.4%
4.0%
2.4%
2.6%
0.7%
3.6%
3.9%
3.5%
1.9%
3.1%
2.0%
2.2%
4.3%
3.9%
4.6%
3.0%
2.8%
2.8%

40

Variable
Definition
Industry-specific characteristics
CAP
Physical fixed assets divided by the value of shipments.
RD
R&D expenditures divided by sales.
P CM
The value of shipments minus labor and material costs, divided by the value of shipments.
IG
Difference of the value of shipments, divided by the value of shipments.
EN T RY
Number of new establishments, divided by the number of existing establishments.
Region-specific characteristics
AGGLOM
Number of establishments by sector per square kilometerU N EM P
The unemployed divided by the labor force.
Firm-specific characteristics
SIZE_5-9
Dummy variable: 1 if the firm’s number of employees is between 5 and 9, 0 otherwise.
SIZE_10-19
Dummy variable: 1 if the firm’s number of employees is between 10 and 19, 0 otherwise.
SIZE_20
Dummy variable: 1 if the firm’s number of employees is between 20 and more, 0 otherwise.
JST OCK
Dummy variable: 1 if the firm is a joint stock company, 0 otherwise.
Entrepreneur-specific characteristics
EDU _U N IV
Dummy variable: 1 if the entrepreneur’s educational background is university level, 0 otherwise.
EDU _X
Dummy variable: 1 if the entrepreneur’s educational background is unknown, 0 otherwise.
AGE_30-39
Dummy variable: 1 if the entrepreneur’s age is between 30 and 39, 0 otherwise.
AGE_40-49
Dummy variable: 1 if the entrepreneur’s age is between 40 and 49, 0 otherwise.
AGE_50-59
Dummy variable: 1 if the entrepreneur’s age is between 50 and 59, 0 otherwise.
AGE_60
Dummy variable: 1 if the entrepreneur’s age is 60 and more, 0 otherwise.
AGE_X
Dummy variable: 1 if the entrepreneur’s age is unknown, 0 otherwise.

Table 3: The definitions of independent variables.

Table 4: The summary statistics of independent variables
Variable
CAP
RD
P CM
IG
EN T RYAGGLOMU N EM P
SIZE_5-9
SIZE_10-19
SIZE_20
JST OCKEDU _U N IV
EDU _X
AGE_30-39
AGE_40-49
AGE_50-59
AGE_60
AGE_X

Mean
0.235
0.027
0.288
-0.018
0.027
1.022
0.045
0.247
0.169
0.205
0.528
0.271
0.463
0.149
0.222
0.269
0.085
0.243

Std.Dev.
0.093
0.020
0.075
0.093
0.010
1.719
0.012
0.431
0.375
0.404
0.499
0.445
0.499
0.356
0.416
0.443
0.279
0.429

Minimum
0.009
0.001
0.026
-0.5380.004
0.0004
0.017
0
0
0
0
0
0
0
0
0
0
0

Notes: The number of observations is 15841.

41

Maximum
2.334
0.132
0.748
0.874
0.113
9.991
0.084
1
1
1
1
1
1
1
1
1
1
1

Table 5: Estimation results

Variable
CAP
RD
P CM
IG
EN T RYAGGLOMU N EM P
SIZE_5-9
SIZE_10-19
SIZE_20
JST OCKEDU _U N IV
EDU _X
AGE_30-39
AGE_40-49
AGE_50-59
AGE_60
AGE_X
Entry year cohorts
Number of observations
Number of exits
Number of competing risks
Log pseudolikelihood(i) Pooled exit
0.290
(0.214)−1.862(1.201)−0.882∗∗∗(0.301)−0.298(0.253)7.805∗∗∗(2.453)−0.015(0.013)−1.452(2.283)−0.335∗∗∗(0.057)−0.224∗∗∗(0.064)0.012(0.059)0.230∗∗∗(0.049)0.161∗∗∗(0.057)0.104∗(0.058)−0.034(0.144)0.188(0.137)0.463∗∗∗(0.135)0.785∗∗∗(0.143)0.452∗∗∗(0.139)
Yes
15841
2439
–
−22881.595

Forms of exit(ii) Bankruptcy−1.999∗∗∗(0.563)−6.909∗∗∗(2.352)−0.093(0.540)−0.327(0.466)
7.993∗(4.330)0.056∗∗∗(0.019)6.737∗(3.970)0.185∗(0.100)0.415∗∗∗(0.110)0.072(0.125)0.081(0.091)−0.237∗∗(0.099)−0.305∗∗∗(0.101)−0.025(0.217)0.073(0.210)0.037(0.209)0.230(0.231)
0.054(0.219)
Yes
15841
717
1722
−6679.904(iii) Voluntary
0.660∗∗∗(0.215)0.045(1.607)−0.900∗∗(0.391)−0.165(0.341)
5.849∗(3.192)−0.058∗∗∗(0.019)−7.536∗∗(3.100)−0.627∗∗∗(0.076)−0.832∗∗∗(0.098)−0.665∗∗∗(0.089)0.104(0.067)0.321∗∗∗(0.081)0.201∗∗(0.080)0.020(0.214)0.232(0.204)0.642∗∗∗(0.199)1.113∗∗∗(0.207)0.655∗∗∗(0.206)
Yes
15841
1280
1159
−12013.969

Notes:
1. Robust standard errors are in parentheses.
2. ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.

42(iv) Merger
0.776∗∗(0.342)−0.146(2.566)−1.269∗∗(0.599)−0.360(0.568)9.357∗(5.079)−0.051(0.034)2.844(5.167)0.096(0.204)0.790∗∗∗(0.191)1.554∗∗∗(0.173)1.202∗∗∗(0.168)0.485∗∗∗(0.148)0.643∗∗∗(0.155)−0.249(0.405)0.382(0.372)0.696∗(0.365)0.579(0.397)0.547(0.368)
Yes
15841
442
1997
−3957.098