Keywords: Bankruptcy; Capital structure; Corporate governance; Law and finance
“Since last month, Mr. Horie, a university dropout, has captivated Japan by taking on – withdreams of taking over – a big and badly run broadcaster, Fuji TV. By gobbling up shares inafter-hours trading, Mr. Horie was able quickly to bypass reporting rules and amass a bigstake in Fuji TV’s subsidiary, Nippon Broadcasting System (NBS), acquiring more thanhalf of the voting rights . . . [Japanese civil servants] have been trying to clarify the rules ofthe corporate-control game. The economy, trade and industry ministry (METI) is advancing“rights plans” – i.e., poison pills – as part of a new set of corporate-takeover rules.”
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“On March 24th, as if to reassure Japan’s public that the soap-opera-like takeover battle willstay interesting, Softbank Investment, an affiliate of the internet empire run by MasayoshiSon, entered the fray . . .. Having recently been treated to a debate about “poison pills” andother defenses, the Japanese public is now learning of the pros and cons of “white knights”who ride in to rescue firms from unwanted takeover bids.”
—Economist Magazine, May 31, 2005
1. Introduction
Over the past decade, significant research has examined the impact of the legal environmenton corporate finance issues (see Levine, 1999 for a comprehensive review). The research has doc-umented key differences across nations in the quality (La Porta et al., 1998) and the enforcement(Modigliani and Perotti, 2000; Berkowitz et al., 2003) of the corporate law. These differences havebeen shown to have strong influences on economic growth (King and Levine, 1993), patterns offinancing for the private sector (La Porta et al., 1997), and corporate governance (La Porta et al.,1999). This literature has largely focused on a static view of the corporate sector across differentcountries by looking at cross-sectional variation in corporate financing and dividend decisions.
However, all economies are marked by some degree of “turnover” in the population of its firmsvia entry of new firms and exit of existing firms. This constant churning of the private sector playsa key economic role by constantly reallocating resources from non-surviving firms to survivingfirms. Schumpeter (1942) captured this in his famous “creative destruction” metaphor arguing:
. . . The fundamental impulse that sets and keeps the capitalist engine in motion comesfrom the new consumers, goods, the new methods of production or transportation, thenew markets, the new forms of industrial organization that capitalist enterprise creates . . .
(Schumpeter, pp. 83).
The dynamic churning of resources is proxied by change in ownership of productive resourcesacross different firms. Empirical studies have documented the link between firms’ operatingperformance and ownership change. Bailey et al. (1992) find that low-productivity plants aremore likely to undergo an ownership change. McGuckin and Nguyen (1995) report an increasein plant-level performance. Maksimovic and Phillips (2001) examine plant-level asset sales andconclude that such ownership changes tend to improve the resource allocation. Geroski (1989)reports that the bulk of productivity increases within an industry can be explained by the rateof entry in that industry. Klapper et al. (2006) find that incumbent firms in naturally high-entryindustries grow more quickly in countries with easier entry requirements. And Chun et al. (2007)show that higher “turnover” in big firms is associated with higher growth.
Our interest in this paper is the disappearance of certain firms and their subsequent resourcereallocation. We equate the delisting of a public firm as its exit or disappearance. A simpleinterpretation of delisting is that the resources (both physical assets as well as in tangible assets)controlled by the disappearing firm have been reallocated to a different owner. This reallocationmay preserve the assets in their existing form (e.g. the company is acquired and becomes asubsidiary of the acquiring firm) or it may lead to the break-up of the firm and its individual assetsmay be sold to different buyers (e.g. a piecemeal sale of assets in a formal bankruptcy process).
Baker and Kennedy (2002) examine the delistings of US firms over the 1963–1995 period.They provide detailed evidence on key attributes of non-surviving (i.e. delisted) firms in the USand argue that take-over and distress-induced delistings are the main drivers of corporate exits.However, both of these mechanisms are likely to be shaped by the regulatory environment and
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legal system which differ across different countries. Djankov et al. (2006) collect informationon the debt enforcement procedures for a hypothetical distressed firm in 80 countries around theworld and relate institutional features to efficient reallocation of assets. They find that the costsand time for recovery vary widely across countries and that richer countries are more efficientthan poorer countries, although countries of French legal origin have the lowest level of efficiencyof debt contracts, after controlling for income. Claessens et al. (2003) study bankruptcies in EastAsia following the Asian crisis. They find, controlling for some firm and country characteristics,that the likelihood of filing is lower for bank-owned and group-affiliated firms and that strongercreditor rights and a better judicial system in the country increases the likelihood of bankruptcyfiling. In this paper we restrict our analysis to seven rich, developed countries. These countrieshave broadly similar GDP per capita. However, they have significantly different legal, regulatory,and institutional frameworks to deal with corporate exits.
The introductory quotes provide a stark illustration of how rudimentary the corporate takeovercode is in Japan compared to the United States (US). This in turn is likely to impact corporategovernance issues such as responses to poor performance. We argue that countries with lessdeveloped corporate control markets and nebulous distress resolution mechanisms should seelower levels of exits. Typically, financial distress manifests itself when the borrower is unable tomake the contractually promised payments. In response, the debtor can either renegotiate its debtcontracts directly with the creditor or use a formal bankruptcy mechanism. Given the wide disparityin creditor rights, it is unlikely that the resolution process would be the same across all the nations.
Our paper builds upon the work by Baker and Kennedy (2002) and Claessens et al. (2003) byextending it to seven major developed countries: Australia, Canada, France, Germany, Japan, theUnited Kingdom (UK), and the United States (US). While all of these countries share a numberof characteristics such as high GDP per capita, there are meaningful differences in their take-over and bankruptcy laws. Japan, for example, did not have a corporate restructuring mechanismsimilar to Chapter 11 in the United States until 2000 and did not allow foreign buyers to launcha takeover attempt using its shares as payments until May 2007. Even within Japanese firms,hostile takeovers rarely take place. While both the UK and the US have very active corporatecontrol markets, continental Europe is still reworking its take-over codes. Similarly, bankruptcyrules differ substantially across countries.
2. Data and summary statistics
The primary data source for our study is the WorldScope database (for non-US firms) andCompustat Global (for US firms). WorldScope includes financial and ownership information on“actively traded” public companies over 50 developed and emerging markets, although it has verylimited coverage of US markets. Compustat Global includes financial data covering a sample ofpublicly traded companies in more than 80 countries, including the 4000 most actively tradedUS firms.1 All listings and delistings include only domestic companies, i.e. we do not includeADRs as domestic companies. We do not include the complete sample of publicly traded UScompanies, in order to make our sample size more comparable across countries. Our universe offirms includes publicly listed, non-financial firms that were included in the database for at least1 year during the 11 year sample period 1993–2003. Thus, our dataset is an unbalanced panel of16,104 distinct firms.
1 Most, but not all, US firms in this sample trade on the NYSE. ADRs are not included in this sample.
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We use delisting information included in the footnotes of both WorldScope and Compustat.About 70% of firms also include the reason reported by the firm for the delisting. For instance, themost common reasons given are “bankruptcy,” “liquidation,” “merger,” or “acquisition.” For theadditional 30% of firms we searched corporate disclosures and used the webservice FirstSourceto search newspaper articles to identify the reason for delisting.
Table 1, Panel A, shows the number of listed and delisted firms, by year and by country. PanelB shows annual delisting rates, by year and country. The final dataset includes information on4515 firm delistings and spotlights the fact that equity market delistings are widespread acrosscountries and over time. In most countries, the data shows an increase in the number of delistingsin the later years. This trend is potentially due to two reasons: the first is the spike in delistingsfrom 2000 to 2002 due to the recession in the US (US delistings jump from 225 in 1998 to 474 in2001). A second possible explanation is due to a larger coverage by the WorldScope database inmore recent years. We control for this secular trend in our multivariate test by including individualyear dummies.
Apart from the absolute number of delistings reported in Panel A, we also construct a relativemeasure of delisting occurrences which we define as “delisting rate.” For each year, this is cal-culated by dividing the number of total delisting in that year by the total number of listed firmsat the start of the year. We report the delistings rates for each year and every country in PanelB. While annual delisting rates vary for each country, we find notable differences in delistingrates across countries. By averaging the annual delisting rate for each country over the 10-yearsample period we can estimate the delisting rate for each country. These are reported in the lastrow. For the entire sample, on average, about 4% of firms that are publicly listed at the start of ayear end up delisting in that year.2 However there are significant cross-sectional variations in thedelisting rates for individual countries. The annual delisting rate in the US and the UK is roughlysix times the delisting rate for Japan. If we treat the historical delisting rates as unbiased estimatesof future delistings, these results imply that in any given year, a US firm is six times more likelyto disappear compared to a Japanese firm.3
We explore the composition of delistings in Table 2, which reports a number of key descriptivestatistics of delistings across the seven sample countries. We report the total number of delistingsin Column 1, with the largest number of delisted firms in the US and UK, and the smallest numberof delisted firms in Australia, Canada, and Germany. In Columns 2–4 we show the total numberof delistings due to (i) liquidations or bankruptcy, (ii) mergers or acquisitions (M&A), or (iii)unknown or other reasons, such as privatizations, and nationalizations. Our final dataset of 4515firm delistings includes 762 bankruptcy liquidations and 2948 mergers and acquisitions (M&A).
It can be argued that not all delistings are in response to poor performance—some firms delistbecause they go private or are seen as a good investment by acquiring firms. To better isolate theeffect of poor performance on delistings we partition from our sample of delistings a subset offinancially distressed firms. Table 2, Column 5 shows the total number of “distressed delistings”:we identify a firm to be financially distressed if the firm’s interest coverage ratio (EBIT dividedby interest expenses) is less than two.4 Examining this sub-sample of delistings allows us to focus
2 This annual delisting rate can be seen as analogous to “marginal mortality rate” used to describe default on publicdebt by Altman (1989).
3 The continuing survival of poorly performing Japanese firms is partially attributed to reluctance of Japanese bankersto force them in bankruptcy. These poor performing firms (referred to as “zombies”) are frequently blamed for holdingback the economy throughout 1990s—see “Dead firms walking” in Economist, September 23rd, 2004.
4 We calculate earnings before interest and taxes (EBIT) as net income plus interest expenses and income taxes.
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Table 1Number of delisted firms, by year and country
Panel A describes annual delistings data for the seven countries in the sample. Columns titled “Listed” provide the total number of non-financial firms that are reported as listedat the start of that year. Columns titled “Delist” report the number of firms that delisted during that year. Panel B reports the annual delisting rate estimated by dividing the totalnumber of delisting during the year by the number of listed firms at the start of the year. Data for the US firms is from Compustat-Global and data for all other countries is fromWorldScope.
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Table 2Summary statistics of non-financial firms, by country
Country Delistings Distressed delistings
Totaldelistings(1)
Delistings dueto liquida-tion/bankruptcy(2)
Delistings dueto M&A (3)
Delistings due toother or unknownreasons (4)
Total distresseddelistings (5)
Distressed delistingsdue to liquida-tion/bankruptcy(6)
This table reports the aggregate number of delisting, and the sub-samples of (i) delistings due to liquidation or bankruptcy, (ii) delistings due to mergers or acquisitions (M&A),and (iii) delistings due to other or unknown reasons, for the seven countries and for the entire sample over the 1994–2003 sample period. The last three columns report delistingsof distressed firms (EBIT to interest expense ratio less than two). We only report distressed delistings for those firms for which the reason for delisting is available. Data for USfirms is from Compustat-Global and data for all other countries is from WorldScope.
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Table 3Summary statistics of country characteristics
Market capitalization is from World Bank Indicators. All other variables are from the World Bank Doing Business Report,2006. G MKTCAP is the 1-year growth rate of total market capitalization. MKTCAP is the total market capitalizationconverted into 2002 US dollars. CREDITOR RIGHTS is a Legal Rights Index, which measures the degree to whichcollateral and bankruptcy laws facilitate lending. SHAREHOLDER RIGHTS is an index of investor protection measuredas the average of three indices: transparency of transactions/extent of disclosure, director liability for self-dealing, andease of shareholders’ ability to sue officers and directors for misconduct.
on exits as a mechanism to resolve financial distress. About 40% of delistings can be classifiedas financially distressed. Table 2, Columns 6 and 7 show the sub-sample of distressed delistingsdue to liquidation/bankruptcy versus M&A.
One explanation for the differences across countries might be variations in market developmentand performance and differences in the business environment. In Table 3 we show country-levelstatistics, which are used later as control variables in our multivariate analysis. First, we includethe average 1-year growth rate of total market capitalization over our sample period (1994–2003).The largest average growth was in Canada and the US (10.77 and 9.84%, respectively) andnegative growth occurred, on average, in Germany and Japan.5 We also show the logged size ofmarket capitalization; in 2002, the size of the capital markets varies from about US$ 380 billionin Australia to over US$ 10 trillion in the US.
The last two columns show indicators of creditor and shareholder rights, from the WorldBank “Doing Business” Indicators (World Bank, 2006). Creditor rights is equal to the “LegalRights Index” for 2004 (the first year of available data) and captures the legal protection providedto creditors.6 Shareholder rights is the “Investor Protection Index” for 2005 (the first year ofavailable data) and is measured as the average of three indices: transparency of transactions/extentof disclosure, director liability for self-dealing, and ease of shareholders’ ability to sue officers
5 Another explanation for delistings might be listing/delisting requirements of different exchanges. While we are unableto provide direct controls for differences across countries, we tabulate the listings requirements for the exchanges inAppendix A. This tabulation suggests that listing requirements are broadly similar across countries and that these maynot be the first order drivers for the observed differences in delisting frequency across different countries.
6 The index measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lendersand thus facilitate lending. The index includes seven aspects related to legal rights in collateral law and three aspects inbankruptcy law. The index can have value between 0 and 10, higher value indicating stronger legal rights for the creditors.The methodology of constructing this data set is described in Djankov et al. (2007a) and the data is available for over 100countries for 2004–2006 and can be accessed at http://www.doingbusiness.org/ExploreTopics/GettingCredit/. Althoughthe index is available for four years it shows little variation from year to year and is strongly correlated with the CreditorRights index originally described in La Porta et al. (1997) wherein the authors had argued that the legal origin (CommonLaw versus Civil law) of a country was the primary determinant of creditors rights.
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and directors for misconduct.7 Although collateral and bankruptcy codes have been revised in allcountries, the relative rankings are fairly stable over time. Results are also robust to the substitutionof earlier measures, such as the Creditors Rights and Investor Protection indices in La Porta et al.(1998).8 Creditor rights vary by legal origins—we find high creditor rights in the Common Lawcountries (Canada, US, and UK) and weaker rights in the Civil Law countries. Shareholder rightsare generally high with the exception of France.
So far we have focused on a simple observed outcome, namely delisting. However a delistingcan happen through different channels. Arguably, a firm that delists because it was acquired islikely to be very different from a firm that delists because it was forced into bankruptcy. Next wefocus on the sample of firms that were delisted and examine the relative differences in performancebetween those firms that were acquired and those that delisted due to bankruptcy. Arguably, anacquisition allows the transfer of assets to an owner who can put these resources to more produc-tive use. A bankruptcy filing would suggest a low value for alternative uses of the filing firm’sassets.9
We include firm-level variables from WorldScope that are consistent with international adap-tations of the Altman Z-score model, which is often used to explain corporate bankruptcies.10 InTable 4 we show average total firm assets (although in our regressions we use the log of totalassets, L ASSETS) as our measure of size, which was found in previous literature to predictthe probability of a firm’s failure. Indeed, the results provide evidence that acquired firms are,on average, larger (except in the case of Japan, insignificantly smaller) than bankrupt firms andsignificantly larger in the UK and US Panel B shows the percentage of delisted firms in each sizequartile, where size quartiles are estimated using the complete sample. We find that most bankruptfirms are in the smallest quartile, while acquired firms are in the largest quartile.
The ratio of total debt to the book value of equity (LEVERAGE) provides an indication of afirm’s leverage and its ability to pay its liabilities during periods of financial stress when facedwith currency and interest shocks. We find that bankrupt firms are generally more leveraged thanacquired firms – and have significantly higher debt ratios in France – which suggests that greaterindebtedness might lead to greater distress. To measure firms’ relative performances, we use theirreturn on assets (ROA), defined as the ratio of net income to total assets. Bankrupt firms also havegenerally significantly lower performance, as measured by ROA, although the average ROA forall delisted firms is, on average, negative. Panel B shows that over half of bankrupt firms are inthe lowest quartile of ROA. These findings suggest that poorly performing firms disappear due tobankruptcy while better performing firms disappear due to acquisition.
Creditors typically use the ROA when extending credit or renegotiating repayments to estimatethe return generated by the firm on the borrowed capital. We find that average ROAs are usuallyhigher for firms that did not file for bankruptcy relative to firms that did file for bankruptcy. This isconsistent with our hypothesis that firms that filed for bankruptcy were less efficient operationally
7 The methodology of constructing this data set is described in Djankov et al. (2007b) and the data is availablefor 72 countries as of the end of 2003 (there is no time series but a single snap shot). The data can be accessed at:http://www.doingbusiness.org/ExploreTopics/ProtectingInvestors/.
8 For instance, the relative rankings of countries in our sample using the Doing Business data is similar to the relativerankings using data from La Porta et al. (1998).
9 It can be argued that more frequent use of formal bankruptcy (as opposed to sale through M&A transaction) maysimply be due to coordination problem across multiple creditors. Still, as long as the value of a firm is demonstrably higherthan its contractual debt obligations, a competitive M&A market would dominate use of formal bankruptcy process.10 See Altman (2000) for a survey of related literature.
Data for the number of total and delisted non-financial US firms is from Compustat-Global and data for all other countries is from WorldScope. Data is from 1994 to 2003.Distressed firms are identified as firms with interest coverage less than two. Bankrupt firms include all firms that delisted because of bankruptcy or liquidation. Acquired includesboth mergers and acquisitions. LEVERAGE is the ratio of total debt to the book value of equity. Return on assets, ROA, measured as the ratio of net income to total assets.FIXED ASSETS is the ratio of fixes assets to total assets. G-SALES is the annual growth in sales for the year prior to year of delisting. INTEREST COVERAGE, is definedas the ratio of EBIT to interest expense. Panel A shows summary statistics by country and asterisks indicate significant t-statistics for the difference between liquidated andacquired firms. Panel B shows the percentage of delisted firms in each size quartile, where size quartiles are estimated using the complete sample (e.g. we find that 37% ofbankrupt firms have total assets in the lowest quartile, as compared to 11% of acquired firms) and asterisks indicate significant t-statistics for the difference between the lowestand highest quartile.
* Significance at 10%.** Significance at 5%.
*** Significance at 1%.
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than firms that did not file. We also use in all regressions 1-digit SIC code dummies to control forsystematic variations in the likelihood of filing for bankruptcy across industries.
Next we include 1-year sales growth denoted by G SALES. We estimate this growth for themost recent year prior to the year in which the firm delists. Thus, for a firm that delists in yeart, G SALES measures the percent change in sales from year t − 2 to year t − 1. As expected, wefind slower growth rates in bankrupt firms. However, the evidence appears mixed as to whetheracquired firms are faster growing firms or acquired as a resolution of distress. For instance,in the UK, US, and Australia, acquired firms have significantly higher 1-year sales growth. Incomparison, we find average negative growth rates of 10% among acquired firms in Japan. Acrossall countries (Panel B), we find that almost half of all bankrupt firms are in the lowest quartile,but acquired firms are more equally distributed.
We also include the ratio of fixed assets to total assets (FIXED ASSET), as an indicator of theliquidation value of the firm in the case of default. We find that acquired firms are significantlymore likely to have a greater percentage of fixed assets than firms that enter bankruptcy. It mightbe the case that these firms are worth more as going concerns and/or are more difficult and costlyto liquidate. It might also reflect the large number of failed IT companies, which generally havelow levels of fixed assets.
Finally, we use the interest coverage ratio, equal to earnings before interest and income taxexpenses (EBIT), divided by interest expense. To identify “distressed” firms in our later analysiswe assign a value of 1 (and 0 otherwise) to firms with interest coverage ratios less than two,which suggests that the firm does not have sufficient cash flow to meet even its interest payment.We show that on average, all bankrupt firms in all countries had negative interest coverage ratios(prior to delisting, whereas the majority of acquired firms soundly solvent (with the exception ofJapan). In Japan, the average interest coverage ratio of acquired firms is only 1.64; this unusualpattern might be explained by both the poor bankruptcy code and the underdeveloped marketfor corporate control found in Japan and the greater use of acquisition as a means of resolvingfinancial distress. Panel B shows that across countries, over 80% of bankrupt firms have interestcoverage in the lowest quartile, while the interest coverage of acquired firms is more equallydistributed.
To understand how delistings affect financially distressed firms, Table 5 shows similar sum-mary statistics for the sub-sample of firms that were identified as distressed prior to delisting, asmeasured by interest coverage less than two. Even for this sub-sample we see the pattern observedearlier: the distressed firms that are acquired are significantly more profitable than the distressedfirms that are liquidated. The ROA for distressed firms is negative but the acquired sub-sample issignificantly less negative than the liquidated sub-sample.
3. Methodology and results
While the above results provide an interesting insight into the delisting patterns across differentcountries, it does not shed any light on why firms disappear. As argued by Schumpeter (1942)and discussed by Baker and Kennedy (2002), if poor performance is the primary reason for firmdisappearance, we should be able to detect it in the difference in the performance of survivingand non-surviving firms. More importantly, the results described so far were univariate and donot control for firm specific characteristics. To address these issues we conduct a multivariateanalysis. Specifically, we estimate a logit model of the following form:
DELISTt = β0 + βi
∑Firm characterstics + βj
∑Country characterstics
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Table 5Summary statistics of distressed delisted firms, by country
Country Total assets (US$ 1000) LEVERAGE ROA 1-Year sales growth (%) FIXED ASSETS
Data for the number of total and delisted non-financial US firms is from Compustat-Global and data for all other countries is from WorldScope. Data is from 1994 to 2003.Distressed firms are identified as firms with interest coverage less than 2. Bankrupt firms include all firms that delisted because of bankruptcy or liquidation. Acquired includesboth mergers and acquisitions. LEVERAGE is the ratio of total assets to the book value of equity. Return on assets, ROA, measured as the ratio of net income to total assets.G-SALES is the annual growth in sales for the year prior to year of delisting. FIXED ASSETS is the ratio of fixes assets to total assets. Asterisks indicate significant t-statisticsfor the difference between liquidated and acquired firms.
* Significance at 10%.** Significance at 5%.
*** Significance at 1%.
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We include the firm characteristics introduced above—L ASSETS, LEVERAGE, ROA, andFIXED ASSETS. Additionally, we include 1-year sales growth, G SALES, as an indicator offirm-level growth opportunities. We also include a dummy equal to 1 for distressed firms (and0 otherwise), which identifies firms with interest coverage less than two. Country-level charac-teristics include average annual growth in market capitalization, creditor rights, and shareholderrights. These measures allow us to test the effect of variations in institutional features, macroeco-nomic performance, and creditor and shareholder rights on the likelihood of bankruptcy. In ourlast regression specification, we include country dummies to identify differences in the degreeto which countries experienced economic contraction and for differences in institutional charac-teristics. In our other specifications, we use the 1-year growth rate of total market capitalization(G MKTCAP), as an indicator of market performance (World Bank, 2005). In addition, we usethe index of creditor rights and shareholder rights to study the influence of legal protection on thedecision to file for bankruptcy (World Bank, 2006).
The results for all firms are reported in Table 6 and are consistent with our earlier results. Firmsthat delist are smaller and worse performing. In addition, they have slower growth. Delisted firmsare also significantly more likely to be distressed prior to delisting.
Table 6Logit regressions—predicting delisting in the following year; all firms
(1) (2) (3) (4)
L ASSETS −0.098 [10.35]*** −0.103 [10.99]*** −0.08 [8.47]*** −0.073 [7.71]***
This table shows logit regressions with robust standard errors clustered at the firm level to correct for within-firm serialcorrelation. The dependent variable is equal to 0 if the firm is listed in the following year and equal to 1 if the firm delistsin the following year. See Table 4 for variable definitions. All columns include year and sector fixed effects. t-Statisticsare in parentheses. ** and *** indicate significance at 5 and 1%, respectively.
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In Table 6, Columns 1 and 2 we use measures of creditor and shareholder rights to see howthese measures differ across different countries. Consistent with Claessens and Klapper (2005),which found no relationship between aggregate creditor rights and the number of country-levelbankruptcies, we find no relationship between creditor rights and the number of delistings. How-ever, in countries with stronger shareholder rights, we find more delistings. This suggests thatmore active shareholders might influence the speedier resolution of financial distress.
In the last two columns we include individual dummy variables for each country, with the USbeing the omitted variable. In Column 4 we split all the Japanese delistings in pre- and post-2000delistings as Japan significantly revised its bankruptcy laws in 2000 (see Xu, 2004). The primarychange to the Japanese bankruptcy law was the introduction of the “Corporate Restructuring Law,”which provided an alternative to liquidation. Prior to 2000, the only available legal resolution offinancial distress was firm closure.
The pattern observed in the earlier univariate test continues to hold even after controlling forvarious firm characteristics. The coefficients for every country are negative (significant at theone percent level) with Japan (both pre- and post-2000) being the most negative and the UKbeing the least negative. Thus, compared to a US firm, a firm based in any of the other six coun-tries is less likely to be delisted. The relative ordering of the coefficients is also intuitive—themarket for corporate control in the UK is considered similar to that of the US and it showsup as the least negative coefficient. Japan, which is frequently portrayed as having rudimen-tary corporate control markets and weakly defined bankruptcy procedures, comes off as theeconomy where firms face the least pressure to delist. Thus, even after controlling for variousfirm-level characteristics, a Japanese firm is significantly less likely to be delisted compared to aUS firm.
Baker and Kennedy (2002) argue that failure to survive is frequently a manifestation of poorperformance. Our univariate results showed that delistings are frequently concentrated in thepoorly performing firms. The multivariate results reported in Table 6 provide further support forthis argument. Across all specifications, firms that delist have lower return on assets and lowersales growth. They are also more likely to be financially distressed (i.e. have interest coverageless than two).
In Table 7 we examine only the sub-sample of firms that delisted and provide an interestingcontrast between firms that delist as a result of being acquired versus those that delist because ofbankruptcy and liquidation. As we argued earlier, if the firm as a whole can be run better by adifferent owner it is likely to be acquired (provided the take-over regulations of a country allow itto happen easily). Alternatively, if the firm as whole does not have an economic rationale to existas a single entity it is more likely to be broken up and sold piecemeal. On average, we shouldexpect firms that disappear due to acquisitions to be better performing than those that delist due toliquidation. Also, since bankruptcy and takeovers are complementary mechanisms, cross-countrydifferences in how these levers work would be worth examining. To test this we focus on thesub-sample of delisted firms and estimate a logit model of the following form:
ACQUIREDt = β0 + βi
∑Firm characterstics + βj
∑Country characterstics
The results are reported in Table 7. As foreshadowed in our univariate tests, poorly performingfirms (low ROA and interest coverage ratios) tend to delist due to bankruptcy rather than acquisi-tion. The first two columns report the impact of creditor rights and shareholder rights. Countriesthat score high on these measures tend to have a higher proportion of their delistings due toliquidation. This suggests that in countries where creditors and shareholders lack the strength
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Table 7Logit regressions—predicting the reason for delisting; sample of delisted firms
(1) (2) (3) (4)
L ASSETS 0.263 [6.82]*** 0.252 [6.59]*** 0.34 [7.87]*** 0.34 [7.87]***
This table shows logit regressions with robust standard errors. The dependent variable is equal to 0 if the firm delisted because of bankruptcy and is equal to 1 if the firm delistedbecause of acquisition. See Table 4 for variable definitions. All columns include year and sector fixed effects. t-Statistics are in parentheses.
* Significance at 10%.** Significance at 5%.
*** Significance at 1%.
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Table 8Logit regressions—predicting the reason for delisting; sample of distressed, delisted firms
(1) (2) (3) (4)
L ASSETS 0.207 [5.20]*** 0.195 [4.92]*** 0.282 [6.51]*** 0.281 [6.50]***
This table shows logit regressions with robust standard errors. The sample includes only firms that delisted and were distressed (defined as interest coverage less than two) inthe year prior to delisting. The dependent variable is equal to 0 if the distressed firm delisted because of bankruptcy and is equal to 1 if the distressed firm delisted because ofacquisition. See Table 4 for variable definitions. All columns include year and sector fixed effects. t-Statistics are in parentheses.
* Significance at 10%.** Significance at 5%.
*** Significance at 1%.
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to undergo the difficult and often costly and time consuming process of closure and liquidation,acquisition might be used as a less efficient resolution for financial distress.
In Columns 3 and 4 we include individual country specific dummy variables. Interestingly,delistings due to acquisitions are significantly more common in countries other than the US withthe exception of Japan (the coefficient for Japan is negative but not significant). Many scholarshave argued that the United States has a debtor-friendly bankruptcy system. This may explainwhy the incidence of bankruptcy filing is significantly higher in United States. In case of Japanboth the bankruptcy system as well as the market for corporate control is used infrequently.
So far our tests have sought to explain the observed frequency of delistings and the channelused to obtain the delisting (i.e. bankruptcy versus acquisitions). Thus the results reported areex post examination of firm exit. Another promising approach is to focus on the ex ante proba-bility of delisting mechanism conditional on poor performance. Here we focus on all firms thatdelisted and were in financial distress (interest coverage less than two). The results are reportedin Table 8. Although this sample by construction only includes delistings of distressed firms, wecontinue to find that both size (log of total assets) and performance (ROA) significantly predictthe resolution of distress; larger and better performing firms are more likely to be acquired. Inaddition, country-level factors continue to influence the resolution mechanism chosen to addressthe financial distress. Our results reported in Columns 1 and 2 show that having strong creditorand shareholder rights is associated with less frequent use of acquisitions (compared to formalbankruptcy procedure) to resolve financial distress. Thus, the delisting of distressed firms tendsto occur through liquidation for firms in countries with strong creditor and shareholder rights.In Columns 3 and 4, we use country specific dummy variables to control for all cross-countrydifferences. With the exception of Japan, all countries are significantly more likely to have dis-tressed delistings occur through acquisition rather than formal bankruptcy. Again, we observethat the coefficient sign for Japan for the pre-2000 is less negative compared to post-2000 periods(although both are statistically insignificant). This is consistent with the increase in usage of thebankruptcy process after the overhaul of Japan’s bankruptcy code in 2000.
4. Conclusion
This paper examines the death process for firms across seven major developed countries.Since the survivors are likely to be the better performing firms, the creative destruction of poorlyperforming firms is central to innovation and growth in an economy. We argue that the marketfor corporate control and formal bankruptcy/liquidation procedures provide the two most potentmechanisms for such relocation of resources from non-surviving firms to surviving firms. Ourpaper shows that delistings are indeed overwhelmingly concentrated in the poorly performingfirms. However, we find interesting cross-country differences, especially for Japan. In our sampleof countries Japan has the least developed market for corporate control. Indeed, Japan has notwitnessed a single contested/hostile take-over of business until recently. Our results bear thisout—poor performance is significantly less likely to result in delisting in Japan compared toany of the other six developed economies. Furthermore, most of the delistings (which are rareto start with) in Japan are due to bankruptcy filings. This implies that firms survive in Japan atperformance levels far lower than what would be allowed in other countries. Since liquidationimplies that a business has few economic alternatives, we expect firms that are delisted due tobankruptcy/liquidation to have a lower level of performance compared to firms that delist dueto acquisitions. We find that conditional on being delisted, acquired firms are significantly betterperforming than firms filing for bankruptcy/liquidation. We also provide some evidence that the
S. Dahiya, L. Klapper / Journal of Financial Stability 3 (2007) 261–278 277
debtor-friendly bankruptcy regime in the US leads to significantly more delistings and feweracquisitions.
Acknowledgements
We thank Thorsten Beck, Stijn Claessens, Luc Laeven, Christian Leuz, and an anonymousreferee for helpful comments and Taras Chernetsky, Rakhi Jain, and George Panos for excellentresearch assistance. The opinions expressed do not necessarily represent the views of the WorldBank, its Executive Directors, or the countries they represent.
Appendix A. Some key listing requirements for major exchanges
Stock exchange Track record of profitability Market capitalization and wideshareholding
Other requirements
NYSEMinimum US$ 10 millioncumulative pre-tax incomefor the last 3 fiscal years
Minimum market capitalizationUS$ 100 million world-wide
For continued listing
Minimum shareholders 2000(holding at least 100 shares)
Minimum listing amount£700,000Minimum 25% of sharesdistributed to public
Toronto StockExchange
Pre-tax earnings > CAN$200,000 for the last fiscalyear
Minimum 1 million free tradingshares
Canadian GAAP
Net tangible assets > CAN$7.5 million
Minimum 300 publicshareholders
Euronext Three years of auditedfinancial statements
Minimum 25% of sharesdistributed to public
IFRS accepted
Australian StockExchange
Net profit after tax of AUS$1.0 million (in aggregate)over the last 3 years
Market capitalization of at leastAUS$ 10.0 million
AUS$ 2.0 million in nettangible assets
Minimum 500 investors
The listing requirements are collected from the websites of various exchanges and Deloitte Consulting’s report “Strategiesfor going public.” We exclude the Deutsche Boerse, which does not have listing requirements. According to the ExchangeAct, trading can be suspended “in the interest of the protection of the public.”
278 S. Dahiya, L. Klapper / Journal of Financial Stability 3 (2007) 261–278
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