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Financial distress and firm exit: determinants of involuntary exits, voluntary liquidations and restructuring exits
Balcaen, Sofie Buyze, J. Ooghe, Hubert
Balcaen, Sofie
Buyze, J.
Ooghe, Hubert
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Publication Type
Working paper
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Supervisor
Publication Year
2009
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Book
Publication Volume
Publication Issue
21
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Publication End page
Publication NUmber of pages
61
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Abstract
This paper provides new insights on the determinants of firm exit after distress. Using nested logit models and a sample of 6118 distress-related exits from Belgium, we analyze the impacts of available and potential slack and the relative efficiency of voluntary liquidation, compared to acquisition and merger, on the type of exit. It appears essential to examine the type of exit outcome as a two-stage process. The first stage considers the fundamental distinction between voluntary and involuntary exit, the latter being the least favorable and most avoided exit strategy. In this situation, high levels of available and potential slack resources, as reflected by large cash holdings, strong group relations and low current leverage, increase the probability of voluntary exit. High slack allows distressed firms to avoid bankruptcy and decide on their exit process. In the second stage, and provided that exit is voluntary, voluntary liquidation is compared to restructuring exit (acquisition, merger or split). In this stage, a higher relative efficiency of voluntary liquidation compared to a restructuring exit, as indicated by absence of group relations, small firm size, high secured debt level and large cash holdings, increase the likelihood of voluntary liquidation and reduce the probability of a restructuring exit.
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Accounting & Finance