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Vol. 64, No. 4, pp. 303-319 (2013)

“Does the Natural Selection Mechanism Work for Non-listed Firms? The Role of Ownership and Business Succession”
Iichiro Uesugi (Institute of Economic Research, Hitotsubashi University)

Using a unique firm-level dataset of more than 30,000 Japanese firms, we examine the selection mechanism of non-listed small and medium-size enterprises (SMEs). With a specific focus on the firms that are managed by owner-managers and faced with the difficulty of finding their successors, we find the following: (1) Exit probability for performance of non-listed firms increases as their performance deteriorates, (2) CEO turnover probability increases when performance of non-listed firms deteriorate, (3) Business abolishment probability is low among firms with owner-managers, and (4) Firm performance is relatively better among exiting firms with a small number of board members than among exiting firms that have a large number of board members. The first two findings are consistent with the natural selection hypothesis of non-listed firms in Japan, while the latter two indicate that we need to have some qualifications to the natural selection story.