Capacity Utilization and Firm Performance

[Purpose] This paper examines the relationship between capacity utilization and future firmperformance. Capacity utilization presents the extent to which a firm utilizes its capacityefficiently. Thus, it is critical for stakeholders of a firm to understand which factorsdetermines capacity utilization as well as how it affects future performance of a firm. [Methodology] We use 6,661 firm－year observations for 2001 to 2018 period for KoreanListed Companies. [Findings] Based on an empirical analysis using a linear model, we find that a positiverelationship between the extent to utilize firm capacity and future firm performance. However, adopting a non－linear model, we document that an inverse U－shaperelationship exists between utilization rate and firm performance. Firm performanceimproves with an increase in utilization rate until a certain level. However if the utilizationrate exceeds a certain level then firm performance will decrease. [Implications] This study enriches related literature by providing empirical evidence thatinformation on capacity utilization has predictive power for explaining future firmperformance. This study also suggests a clear clue that there is the optimal level of capacityutilization which may drive firm performance. Overall the findings convey practicalimplication that stakeholders would benefit from using information on the capacityutilization when they evaluate and predict its future performance.