Academic journal article Academy of Accounting and Financial Studies Journal

Capital Structure Choices and Survival in a Deregulated Environment

Academic journal article Academy of Accounting and Financial Studies Journal

Capital Structure Choices and Survival in a Deregulated Environment

Article excerpt


The 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.


From 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. Because of the logistics and equipment required to pick and deliver smaller loads, the LTL segment requires greater capital and equipment to create the terminals and networks needed to combine loads and deliver efficiently across the country. The TL segment requires somewhat less capital investment (i.e., one independent trucker can pick up and deliver a load directly to the end point) but many firms in the TL segment rely on leverage via equipment financing to enter the market.


In the trucking industry, inventories of any kind are a very small part of total assets and usually consist of parts for repairs and tires. The majority of the fixed assets are equipment which is financed. Financing in the trucking industry is easier than in many industries because there are many platforms to finance tractors and trailers and there is a ready market for the vehicles in the event of a default. The availability of lenders covers a broad spectrum with financial instruments limited only by the imagination of the lender and the needs of the borrowers. The basic lenders that are available are dealer financing, third party equipment financers, operating leases and financial leases.

Borrowing is necessary for growth because the industry is capital intensive and each individual carrier needs critical mass to survive. …

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