Asset specificity,capital intensity and capital structure: An empirical test

Capital investment and capital financing decisions interact. To resolve current controversies in investment-leverage-growth relationships requires an integrated industrial organization/financial economics empirical model of profit margins, capital investment intensity, leverage and risk. Using cumulative future losses in discontinued operations to measure the asset specificity of the firm's investments, empiricai results support a complementary (positive) relationship between debt and investment, the debt financing of verifiable contemporaneous growth, equity financing of future growth and the debt financing of specific assets. This evidence rejects the transactions cost theory of capital structure in Fortune 500 firms.