Natural Selection: A Review of Studies on Firms’ Exit and Efficiency

Abstract

In this study, we review the studies on the relation between firms’ efficiency or profitability and their exit. Although we take it for granted that inefficient or unprofitable firms are more likely to exit, which we call the natural selection hypothesis, some theories predict that it is not necessarily the case. After reviewing these theories, we sort out a large amount of empirical studies that report direct and related evidence on the relation between efficiency or profitability and exit.

Keywords: Natural selection, exit, efficiency, cleansing effect

JEL Classification: D22, D24, L25, E32