The temporary shutdown decision: Lessons from the Great Recession
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The Department of Finance seeks to provide knowledge of the descriptive, behavioral, and analytical background of financial management, in preparation for positions in sales management, marketing research, retail, etc.
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The Department of Finance was formed in 1984 in the College of Business Administration (later College of Business).
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1984–present
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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.
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This accepted article is published as Brown, J.R., Carpenter, R., Petersen, B., The Temporary Shutdown Decision: Lessons from the Great Recession, Managerial and Decision Economics,2019; 40(7);772-786. doi: 10.1002/mde.3040 . Posted with permission.