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

This research studies the relationship between the capital structure of a firm and its asset utilization rate in resource intensive industries. We study this issue from both private and public policy perspectives. From a private perspective, it's conceivable that a positive relationship may exist because a company is trying to increase its use of debt to effect a more efficient 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 exploitation of natural resources when debt levels rise. This research examines measures of leverage and asset utilization in firms from the mining, oil, and timber industries to determine whether the behavior alleged in the PALCO/MAXXAM case (an increased cutting rate to pay off junk bond financing) has been observed more systematically. We observe a positive relationship between leverage and asset utilization in all three industries when leverage is calculated using book value measures. When market value measures are used, this positive relationship no longer holds in the mining industry. Possible explanations for these results are offered.