Population Aging and Small Business Exits

Author Name XU Peng (Hosei University)
Creation Date/NO. November 2021 21-E-091
Research Project Study Group on Corporate Finance and Firm Dynamics
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Japan has been experiencing substantial growth in the proportion of their elderly population due to historically low fertility. Aging has strong adverse impacts on economic growth, productivity, entrepreneurship, and technology adoption. In this study, we investigate the effect of population aging as well as the effect of macro factors on corporate exits of small businesses. Economically inefficient small firms are more likely to exit the market via business closures or bankruptcies, larger insolvent firms attempt to survive by filing for rehabilitation, and larger underperforming firms seek acquisitions as a flight from loss strategy to avoid a worst-case scenario such as bankruptcy or rehabilitation. All other things being equal, population aging increases acquisitions but decreases forced exits such as rehabilitation and bankruptcies. Though it is well-documented that recent voluntary exits are driven by CEO aging in small business, population aging has no significant effect on business closures of firms operated by aged CEOs. Yen appreciations trigger rehabilitation and this effect is robust. A decline in long-term interest rates especially increases bankruptcies of non-aged CEOs. As for exit routes, population aging significantly decreases the probability of force exits relative to business closures or acquisitions.