Financial Distress and Firm Exit: Determinants of Involuntary Exits, Voluntary Liquidations and Restructuring Exits

Ghent University Economics and Business Administration Working Paper

44 Pages Posted: 11 Jul 2009 Last revised: 10 Sep 2009

See all articles by Sofie Balcaen

Sofie Balcaen

Ghent University - Department of Accountancy and Corporate Finance

Jozefien Buyze

Centre of Applied Mathematics and Computer Sciences

Hubert Ooghe

Vlerick Business School; Ghent University - Department of Accountancy and Corporate Finance

Date Written: July 9, 2009

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.

Keywords: firm exit, slack resources, stakeholder dependence, nested logit

JEL Classification: G33, G34, C12, C25, D21

Suggested Citation

Balcaen, Sofie C. F. and Buyze, Jozefien and Ooghe, Hubert, Financial Distress and Firm Exit: Determinants of Involuntary Exits, Voluntary Liquidations and Restructuring Exits (July 9, 2009). Ghent University Economics and Business Administration Working Paper, Available at SSRN: https://ssrn.com/abstract=1431835 or http://dx.doi.org/10.2139/ssrn.1431835

Sofie C. F. Balcaen (Contact Author)

Ghent University - Department of Accountancy and Corporate Finance ( email )

Bedrijfsfinanciering (RUG)
Kuiperskaai 55 E
Ghent, B-9000
Belgium

Jozefien Buyze

Centre of Applied Mathematics and Computer Sciences ( email )

Krijgslaan 281
Ghent, B-9000
Belgium

Hubert Ooghe

Vlerick Business School ( email )

Reep 1
B-9000 Gent
Belgium

Ghent University - Department of Accountancy and Corporate Finance

Kuiperskaai 55 E
B-9000 Ghent
Belgium

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