Capital Structure and Product Market Behavior: An Examination of Plant Exit and Investment Decisions

Center for Economic Studies Working Paper at University of Munich, Number 89

Posted: 5 Jul 1998

See all articles by Dan Kovenock

Dan Kovenock

Chapman University - Economic Science Institute; CESifo (Center for Economic Studies and Ifo Institute)

Gordon M. Phillips

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Date Written: October 1995

Abstract

This paper examines whether sharp debt increases through leveraged buyouts and recapitalizations interact with firm productivity and industry characteristics to influence plant closing and investment decisions. Given the endogeneity of recapitalization decisions, we also predict recapitalization decisions using exogenous productivity and market structure variables and use the predicted values as a measure of capital structure change. The results show that industry concentration, capacity utilization and relative plant productivity are significant determinants of the recapitalizations and subsequent plant (dis)investment decisions. We find that the effects of high leverage on investment and plant closing are significant when the industry is highly concentrated. Following their recapitalizations, firms in industries with high concentration are more likely to close plants and less likely to invest. In addition, we find that rival firms are less likely to close plants and more likely to invest when the market share of leveraged firms is higher.

JEL Classification: G32, D43

Suggested Citation

Kovenock, Daniel and Phillips, Gordon M., Capital Structure and Product Market Behavior: An Examination of Plant Exit and Investment Decisions (October 1995). Center for Economic Studies Working Paper at University of Munich, Number 89, Available at SSRN: https://ssrn.com/abstract=7141

Daniel Kovenock

Chapman University - Economic Science Institute ( email )

1 University Drive
Orange, CA 92866
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Gordon M. Phillips (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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