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• W1518264006 abstract "ABSTRACTWe examine the impact of capital structure choices for survival in a deregulated industry. Financial leverage in particular has been identified by numerous prior studies as a major determinant of the probability of survival in most industries. In the course of a deregulation, the debt overhang effect stemming from high leverage negatively affects the ability of existing firms to survive when a regulatory shock occurs (Zingales, 1998). Following such a regulatory shock, and consistent with the tradeoff and debt overhang theories of capital structure, firms are more likely to reduce their level of leverage (Ovtchinnikov, 2010). This causes the expected costs of financial distress to rise higher and we can expect a negative association between leverage and survival in a deregulated industry. However, in a highly competitive setting, firms may signal their level of by contracting for more debt instead of equity (Ross, 1977). This signaling perspective can therefore induce the existence of a positive association between leverage and survival in a deregulated context. Using a sample of private trucking firms, we test this hypothesis and find a negative association between leverage and survival. In a refined analysis aimed at distinguishing high quality versus low quality firms, we adopt the capacity approach of De Vany and Saving (1977). Consistent with our initial findings, we find that the negative association between leverage and survival increases with the level of excess capacity.INTRODUCTIONThe U.S. interstate trucking industry was deregulated by Motor Carrier Act of 1980 (MCA 1980). With deregulation, the barriers to entry were lowered and, in the 1980s, many new trucking firms entered the market. We focus on the private trucking firms that either survived deregulation or were created after that regulatory shock and examine the association between a trucking firm's choice of capital structure and its chances of survival after deregulation. Contrary to other studies focusing on the same question that rely on samples of publicly traded firms, we only look at private firms. Our reliance on private firms allows us to examine the effect of constrained capital choices whereby a deviation from optimality is particularly detrimental for the survival of these firms.DEREGULATION IN THE TRUCKING INDUSTRYFrom 1935 to 1980, the Interstate Commerce Commission (ICC) federally regulated interstate motor carriers in the U.S. The ICC was created in 1887 to regulate railroads that were perceived to be monopolistic and were practicing rate discrimination. As other modes of transportation evolved in the 1900s, the ICC eventually was empowered to regulate all common carriers. The ICC approved licensing, rates (tariffs), and routes. Because of the restrictive ICC controls, entry into these regulated markets was very difficult. In addition, the regulations led to inefficacies in the operations of the carriers (Moore, 1993). Since the ICC regulated rates and routes, carriers could operate with inefficient cost structures and still earn a market return on investment.Beginning in the 1950s, the criticisms of the effects of regulation led to efforts to begin to deregulate the controls over common carriers. In 1977, the ICC began to change their policies related to the trucking industry (Zingales, 1998). Barriers to entry eased and increased rate competition was encouraged. The passage of the MCA 1980 solidified these steps towards deregulation of interstate common carriers.While the MCA 1980 did not completely remove interstate trucking companies from regulation, it did ease the economic restrictions of the regulations. As a result, dramatic changes in the trucking industry occurred and influenced segments of the trucking industry differently. As noted by Zingales (1998), the interstate trucking business has two distinct segments: the truckload (TL) segment which includes carriers which transport full loads of 10,000 pounds or more from point to point, and the less than truckload (LTL) segment carriers which transport loads of less than 10,000 pounds and need to consolidate loads to move efficiently from point to point. …" @default.
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• W1518264006 date "2013-04-01" @default.
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• W1518264006 title "Capital Structure Choices and Survival in a Deregulated Environment" @default.
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