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

  • Dan Kovenock
  • Gordon M Phillips

This paper examines whether capital structure decisions interact with product market characteristics to influence plant closing and investment decisions. The empirical evidence in this paper shows that a firm's capital structure, plant level efficiency, and industry capacity utilization are significant determinants of 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.

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File URL: ftp://ftp2.census.gov/ces/wp/1995/CES-WP-95-04.pdf
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Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 95-4.

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Date of creation: Mar 1995
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Handle: RePEc:cen:wpaper:95-4
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  18. 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.
  19. 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.
  20. 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.
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  24. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
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