Ex Post Production Flexibility, Asset Specificity, and Financial Structure

Journal of Accounting, Auditing and Finance, Vol 13, No 1, Winter 1998

Posted: 20 Jul 1998

See all articles by Varouj A. Aivazian

Varouj A. Aivazian

University of Toronto - Rotman School of Management

Michael Berkowitz

University of Toronto - Rotman School of Management

Abstract

This paper examines the interaction between the firm's production and financing decisions, focusing on the specificity of its assets and on the flexibility of its production technology. The paper shows that production flexibility increases potential tax shields from debt and lowers expected bankruptcy costs and that, when asset specificity is low, operating and financial leverage tend to be complements, with the complementarity becoming strong as ex post capacity adjustment costs increase. It also shows that an increase in the corporate tax rate induces the firm to increase capacity investment and financial leverage when asset specificity is low and that this effect becomes stronger as ex post capacity adjustment costs increase. The results suggest that in industries where assets are easily redeployable, the impact of taxes on both investment and financial leverage will be positive and increasing with the size of capacity adjustment costs.

JEL Classification: G31, G32

Suggested Citation

Aivazian, Varouj A. and Berkowitz, Michael K., Ex Post Production Flexibility, Asset Specificity, and Financial Structure. Journal of Accounting, Auditing and Finance, Vol 13, No 1, Winter 1998, Available at SSRN: https://ssrn.com/abstract=89932

Varouj A. Aivazian

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Department of Economics
Toronto, Ontario M5S 3E6
Canada
416-978-2375 (Phone)
416-978-5433 (Fax)

Michael K. Berkowitz (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Dept. of Economics
Toronto, Ontario M5S 3E6
Canada
416-978-2678 (Phone)
416-978-6713 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
1,534
PlumX Metrics