Capacity overhang and corporate disinvestment decisions |
| |
Authors: | Ilker Karaca Travis R A Sapp |
| |
Institution: | Ivy College of Business, Iowa State University, Ames, Iowa, USA |
| |
Abstract: | We use a stochastic frontier model to estimate a firm's capacity overhang. We find that excess capacity is positively related to a drop in new capital expenditures, an accumulation of depleted long-term assets, and outright sales of investment assets. However, the sale of long-term assets (property, plant, and equipment PP&E]) peaks for intermediate levels of excess capacity and then declines. We attribute this to growth options. We test for evidence of a preference ordering in the firm's choice of responding to excess capacity and find evidence for a pecking order in firm disinvestment, where sales of long-term assets are a measure of last resort. |
| |
Keywords: | |
|
|