Capital structure and asset utilization: the case of resource intensive industries

This research studies the relationship between the capital structure of a f irm and its asset utilization rate in resource intensive industries. We stu dy this issue from both private and public policy perspectives. From a priv ate perspective, it's conceivable that a positive relationship may exist be cause a company is trying to increase its use of debt to effect a more effi cient utilization of its assets. However, from a public policy perspective, finding a positive relationship between asset utilization and debt levels in natural resource sensitive industries may signal a sub-optimal exploitat ion of natural resources when debt levels rise. This research examines meas ures of leverage and asset utilization in firms from the mining, oil, and t imber industries to determine whether the behavior alleged in the PALCO/MAX XAM case tan increased cutting rate to pay off junk bond financing) has bee n observed more systematically. We observe a positive relationship between leverage and asset utilization in all three industries when leverage is cal culated using book value measures. When market value measures are used, thi s positive relationship no longer holds in the mining industry. Possible ex planations for these results are offered. (C) 2001 Elsevier Science Ltd. Al l rights reserved.