Time to Exit: Rational, Behavioral, and Organizational Delays

Abstract

Existing studies of exit delay typically focus on rational, behavioral, or organizational explanations in isolation. We integrate these different theoretical explanations, developing testable hypotheses for each, and examine them using the population of US banks between 1984 and 1997. Banks’ exit behavior is not consistent with theories emphasizing the option value of avoiding re-entry costs; however, patterns of exit do support models of rational delay under ability uncertainty. Controlling for this source of rational delay, we find evidence of delay due to behavioral bias – firms discount negative signals of profitability relative to positive signals – and organizational considerations – delay increases with the separation of ownership and control. These results demonstrate that all three sets of theories are necessary to describe exit behavior.

Keywords: exit, failure, banking, option value, behavioral bias, escalation of commitment

JEL Classification: D21, D81