Survivorship and the Economic Grim Reaper

Abstract

The ten year survival rate for firms trading on the New York and American Stock Exchanges between 1963 and 1995 is only 61%. This paper explores the process by which firms come to be delisted. We calculate the returns of firms from ten years before delisting to their delisting date and show that, on average, the economic grim reaper kills poorly performing firms. We document takeover and distress delisting rates through time, analyze pre-delisting equity market returns for both groups, and explore how firm characteristics and regulations governing corporate takeovers and bankruptcy affect the friction with which these processes operate. We believe this is the first analysis to document long-term equity market and operating performance of delisting firms. The study builds on research from both finance and industrial organization and is consistent with a Schumpeterian view of economic development.Baker 2

The dynamic nature of survival determinants in e-commerce

“…Increasing sales creates a more nurturing environment for firms, which lessens the probability of exit. In a similar line of thought, Baker and Kennedy (2002) document the negative relationship between GDP growth rate and firms' distress delisting rates from the major stock exchanges.…”

Thirty Years After Michael E. Porter: What Do We Know About Business Exit?

“…The redeployability of assets, e.g., drives the extent to which a firm loses value before delisting. Firms whose assets are more likely to be redeployed and which are small lose less value before disappearance than firms characterized by resources which are less likely to be redeployed and larger in size (Baker & Kennedy, 2002). In a similar vein, empirical findings by Villalonga and McGahan (2005) shed new light on the likelihood of divestiture as compared to alliances.…”

“…Such a step is difficult "because labor unions' contracts must be satisfied in dismissal, customers must be persuaded to substitute other products, the trade must accept the firm's explanation concerning why the company is unable to cover particular needs of the customer, and the value of untold millions of dollars invested in competitive positioning can never be recovered if no buyer for the business unit can be found" (Harrigan, 1982, p. 729). Dissolution can occur through formal bankruptcy if a private debt restructuring is not possible (Gilson, 1990;Gilson, John, & Lang, 1990) or through delisting from a stock exchange (Baker & Kennedy, 2002).…”

“…Yet a large number of small-sized firms can be found at every stage in the industry life-cycle because the large amount of small firms in virtually every industry reflects an ongoing process of entry into industries and not the survival of a constant population of small firms over a long time period (Audretsch & Mahmood, 1994). Findings by Baker and Kennedy (2002) illustrate this continuing process of entry and exit. Their investigation of a population of 7,455 firms in the 1963-1995 time period shows that the difference between annual entry and exit rates is small (6.66% versus 5.11% on average).…”

“…Firms that exit due to takeover almost fully regain their losses in the year before the incident, whereas firms that are being delisted due to bankruptcy steadily continue losing value in the last year prior to exit (Baker & Kennedy, 2002). Financial distress frequently results in bankruptcy but many firms successfully resist it and restructure their debt privately.…”