Production Flexibility, Product Markets, and Capital Structure Decisions
Review of Financial Studies, Volume 29, Issue 6, 1 June 2016, Pages 1501–1548
Posted: 12 Jun 2012 Last revised: 23 Jan 2018
Date Written: December 9, 2015
Abstract
We examine how production flexibility affects financial leverage. A worldwide sample of energy utilities allows us to apply direct measures for production flexibility based on their power plants. We find that production flexibility increases financial leverage. For identification, we exploit privatizations and deregulations of electricity markets, geographical variations in natural resources, the technological evolution of gas-fired power plants, and differences in electricity prices and recapitalization cost across regions. Production flexibility affects financial leverage via the channels of reduced expected cost of financial distress and higher present value of tax shields. The relative importance of these channels depends on firms' profitability.
Keywords: Capital structur, financial leverage, production flexibility, operating leverage, product markets, energy utilities
JEL Classification: G30, G32
Suggested Citation: Suggested Citation