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

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