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Discussion Papers no. 706

Does profit matter?

Exit dynamics of start-up firms

While little attention has been paid to the role of profitability in the empirical literature on firm exit, we employ a detailed recently established database of Norwegian manufacturing firms to identify the extent to which profitability explains a firm's exit behavior. Some key characteristics of the data are: i) 25 percent of firms that exited experienced positive profits every year before exit, ii) there is no negative profitability shock immediately prior to exit, and iii) firms may continue production, even though they frequently experience negative profits. We use these data to estimate a theory-founded econometric model of exit, where the exit and investment decisions of firms are formulated as the solution to a discrete-continuous dynamic programming problem. In particular, the probability of exit depends on profitability, which is not directly observable to the econometrician. We estimate this model for six manufacturing industries and find that increased profitability lowers the probability of exit and that this effect is statistically significant in all industries. We show that the difference in annual exit probability between firms that exited during the observation period (1994–2009) and firms that did not exit is highly persistent over time, and there is no tendency for a sharp increase in the estimated exit probability just prior to exit. Hence, it is the cumulative effect of the higher risk of exit over several years, compared with the average firm, that causes firms to exit.

Om publikasjonen

Tittel

Exit dynamics of start-up firms. Does profit matter?

Ansvarlige

Rolf Golombek, Arvid Raknerud

Serie og -nummer

Discussion Papers no. 706

Utgiver

Statistics Norway

Emne

Discussion Papers

ISSN

1892-753X

Antall sider

52

Målform

Engelsk

Om Discussion Papers

Discussion papers comprise research papers intended for international journals and books. A preprint of a Discussion Paper may be longer and more elaborate than a standard journal article as it may include intermediate calculations, background material etc.

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