Corporate Restructuring and Investment Horizons
NBER Working Paper No. 3794 (Also Reprint No. r1921)
The recent wave of corporate restructuring in the United States has been accused of shortening the investment horizons of U.S. managers. This paper surveys the empirical and case study evidence on restructuring and investment behavior and reaches the following conclusions 1) A large fraction of the restructurings were motivated by synergistic or other efficiency-enhancing reasons and have little to do with investment horizons. 2) However, massive shifts toward debt in the capital structure of manufacturing firms. often induced by hostile takeover threats, are accompanied by reduced investment of all kinds, particularly in a few industries which are characterized by "stable' technology and cost-based innovative strategies. 3) The evidence is consistent with optimizing behavior on the part of firms faced with a lower relative price of debt to equity and a higher overall cost of capital during the nineteen-eighties, but there all still doubts about whether the U.S. market for corporate control elicits the correct level of long run investment. Thus the paper concludes with a discussion of the evidence on cross-country differences in the financing of investment and the market for corporate control and suggestions for future research in this area.
Published: Business History Review, vol 68, Spring 1994, pp 110-143