Firm Exit during the COVID-19 Pandemic: Evidence from Japan

Firms have exited the market since the start of the COVID-19 pandemic. To evaluate the number of firms exiting the market and their exit rate, we construct a simple model, in which firms optimally choose stopping time for their exit. We estimate the model using firm-level data on firm exits before the pandemic. Subsequently, using recent survey data on firm sales growth, we simulate potential firm exits during the pandemic under the condition that the institutional background, represented by activities such as bankruptcy procedures and government rescue plans, did not change the exit option value. Our main findings are as follows. First, we find sizable heterogeneity with respect to the number and rate of firm exits across industries and regions. Second, in aggregate, the pandemic potentially increased firm exits by around 20% compared to the previous year under the assumption that the recent reduction in firm sales is temporary and, thus, partially incorporated into firms' expectations for future trend sales growth. In two extreme cases in which the recent sales reduction has a full or no impact on firms' expectations for future sales, firm exits increased by 110% and 10%, respectively. Third, these increases are mainly due to the decrease in the expected sales growth rate, rather than the increase in uncertainty. Finally, we quantify the hypothetical amount of government subsidies needed to prevent excess increases in potential firm exits, which is around 10-3 of Japan's GDP.