Exit From Declining Industries and the Case of Steel Castings

The conflicts between managers and owners on one hand and creditors on the other in diversified and undiversified firms in a declining industry are examined. It is argued that an undiversified firm has less incentive to close a loss-making plant than a well-capitalized diversified firm. In an undiversified firm, if closure involves cash outflows, shareholders and managers can lose everything when closure occurs. If closure is postponed, there is usually some chance of recovery that will benefit these 2 groups at the expense of other creditors. In a well-capitalized diversified company, closure of a single loss-making plant rarely means total loss for shareholders, and managers can find other jobs more easily. Examining the UK steel castings industry, it is found that, between 1979 and 1983, a total of 27 plants closed. Many of the closing plants were not the least profitable. Firms that were diversified and financially strong appeared more likely to close than those that were not. It is speculated that, in these firms, there may have been fewer conflicts among the various stakeholders.