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

  • Kovenock, D.
  • Phillips, G.M.

We examine whether sharp debt increases through leveraged buyouts and recapitalizations interact with market structure to influence plant closing and investment decisions of recapitalizing firms and their rivals. We take into account the fact that recapitalizations and investment decisions are both endogenous and may be simultaneously influenced by the same exogenous events. Following their recapitalizations, firms in industries with high concentration are more likely to close plants and less likely to invest. Rival firms are less likely to close plants and more likely to invest when the market share of leveraged firms is higher. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 313.95.

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Length: 29 pages
Date of creation: 1995
Date of revision:
Handle: RePEc:aub:autbar:313.95
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  1. repec:dgr:kubcen:199483 is not listed on IDEAS
  2. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-85, December.
  3. Michael D. Whinston, 1988. "Exit with Multiplant Firms," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 568-588, Winter.
  4. Hunsaker, J. & Kovenock, D., 1995. "The Pattern of Exit from Declining Industries," Purdue University Economics Working Papers 1072, Purdue University, Department of Economics.
  5. DeAngelo, Harry & DeAngelo, Linda, 1991. "Union negotiations and corporate policy *1: A study of labor concessions in the domestic steel industry during the 1980s," Journal of Financial Economics, Elsevier, vol. 30(1), pages 3-43, November.
  6. Vojislav Maksimovic, 1988. "Capital Structure in Repeated Oligopolies," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 389-407, Autumn.
  7. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April.
  8. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June.
  9. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-40, December.
  10. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
  11. Smith, C.W. & Watts, R.L., 1992. "The Investment Oppotunity set and Corporate Financing, Dividend and Compensation Policies," Papers 92-02, Rochester, Business - Financial Research and Policy Studies.
  12. Allen, B. & Deneckere, R. & Faith, T. & Kovenock, D., 1994. "Capacity Precommitment as a Barrier to Entry: A Bertrand- Engeworth Approach," Papers 9483, Tilburg - Center for Economic Research.
  13. Gilbert, Richard J., 1987. "Investment and Coordination in Oligopolistic Industries," Department of Economics, Working Paper Series qt51b0f7sq, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  14. Kim, Moshe & Maksimovic, Vojislav, 1990. " Debt and Input Misallocation," Journal of Finance, American Finance Association, vol. 45(3), pages 795-816, July.
  15. Dunne, Timothy & Roberts, Mark J & Samuelson, Larry, 1989. "The Growth and Failure of U.S. Manufacturing Plants," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 671-98, November.
  16. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  17. Frank R. Lichtenberg & Donald Siegel, 1991. "The Effects of Leveraged Buyouts on Productivity and Related Aspects of Firm Behavior," NBER Working Papers 3022, National Bureau of Economic Research, Inc.
  18. John R. Baldwin & Paul K. Gorecki, 1991. "Firm Entry and Exit in the Canadian Manufacturing Sector, 1970-1982," Canadian Journal of Economics, Canadian Economics Association, vol. 24(2), pages 300-323, May.
  19. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  20. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  21. Phillips, Gordon M., 1995. "Increased debt and industry product markets An empirical analysis," Journal of Financial Economics, Elsevier, vol. 37(2), pages 189-238, February.
  22. Marvin B. Lieberman, 1990. "Exit from Declining Industries: "Shakeout" or "Stakeout"?," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 538-554, Winter.
  23. Kaplan, Steven, 1989. "The effects of management buyouts on operating performance and value," Journal of Financial Economics, Elsevier, vol. 24(2), pages 217-254.
  24. Shapiro, Carl, 1989. "Theories of oligopoly behavior," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 6, pages 329-414 Elsevier.
  25. Martha A. Schary, 1991. "The Probability of Exit," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 339-353, Autumn.
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