The temporary shutdown decision: Lessons from the Great Recession. (4th August 2019)

• Record Type: Journal Article
• Authors: Brown, James R.; Carpenter, Robert E.; Petersen, Bruce C.
• Is Part Of: Managerial and decision economics. Volume 40:Number 7(2019)
• Page Start: 772
• Page End: 786
• Publication Date: 2019-08-04
• Subjects: Managerial economics -- Periodicals; Decision making -- Periodicals; Management -- Periodicals; 658.15
• DOI: 10.1002/mde.3040
• Languages: English
• ISSNs: 0143-6570

Abstract

Abstract : The temporary shutdown condition provides guidance on dealing with a serious transitory downturn in demand. The traditional condition says managers should stop production when revenues fall below avoidable costs. This condition is flawed because it ignores how lost human capital and reputational damage harm future profits. As a consequence, firms may optimally operate with losses far larger than stipulated by the traditional condition. We provide the first broad empirical analysis of the temporary shutdown decision, focusing on the Great Recession. We show that large operating losses were common and temporary shutdowns were exceedingly rare, even among very small public firms.