Exit or “Death” of Firms

Abstract

Many theoretical models neglect the possibility that firms disappear. However, firms do not continuously grow. They undergo transient periods of decay that are sometimes persistent and then surrender to their decline which may ultimately lead to their exit from business. Referring as in Chap. 2 to Bonaccorsi Di Patti and Dell’Ariccia (2004), the yearly rate of death of Italian firms is, on average, equal to 5.7% with a maximum of about 20% for some specific industry branches. Knaup (2005) examined the business survival characteristics of all establishments that started in the United States in the late 1990s when the boom of much of that decade was not yet showing signs of weakness, and found that, if 85% of firms survive more than one year, only 45% survive more than four years. Brixy and Grotz (2007) analyzed the factors that influence regional birth and survival rates of new firms for 74 West German regions over a 10-year period. They documented significant regional factors as well as variability in time: the 5-year survival rate fluctuates between 45% and 51% over the period from 1983 to 1992.