Capacity overhang and corporate disinvestment decisions

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 (prop...

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Bibliographic Details
Published inThe Journal of financial research Vol. 46; no. 3; pp. 825 - 847
Main Authors Karaca, Ilker, Sapp, Travis R. A.
Format Journal Article
LanguageEnglish
Published Columbia Wiley Subscription Services, Inc 01.09.2023
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Summary: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.
Bibliography:trasapp@iastate.edu
Travis R. A. Sapp may be reached at Ivy College of Business, Gerdin Business Bldg. Room 3362, 2167 Union Drive, Iowa State University, Ames, IA 50011‐2027, Phone: (515) 294‐2717, email
Ilker Karaca may be reached at Ivy College of Business, Gerdin Business Bldg. Room 3235, 2167 Union Drive, Iowa State University, Ames, IA 50011‐2027, Phone: (515) 294‐9553, Fax: (515) 294‐3525, email
ikaraca@iastate.edu
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ISSN:0270-2592
1475-6803
DOI:10.1111/jfir.12333