Capacity utilization rate and company performance before the COVID-19 economic crisis: Evidence from listed companies in China’s electricity industry

The electricity industry of China, which is crucial to the running of the whole economy, has ironically experienced increasing idle capacity as well as electricity shortage in recent years. The declined economic growth rate together with the COVID-19 pandemic induced much idle capacity to this industry in 2020, whereas high coal price, excessive foreign trade orders and unexpected drastic climate change impacts led to the worst blackouts in 2021 and 2022. Considering that the utilization rate of capacity may affect the performance of companies, this paper quantifies the impacts of capacity utilization rate (CUR) on company performance, from the perspective of profitability, market value and investment efficiency. We find a significantly positive relationship between the CUR and company performance, in all the three aspects examined based on the data of China’s listed companies in the electricity industry from 2000 to 2019. In particular, idle capacity dampens a company’s profitability by the largest magnitude, whereas the adverse impacts on market value and investment efficiency are relatively small. We document robust results employing a battery of robustness checks, including measuring the CUR with alternative methods and variables, replacing the proxy variable for company performance, and considering potential endogeneity problem. The results demonstrate heterogeneity across markets with different competition degree, companies with different ownership, and companies generating electricity with different types of energy. Further analysis over mechanisms confirms that the negative impacts of idle capacity are channeled through slowing down the turnover rate of assets and inhibiting companies’ ability to bear tax burden and to obtain long-term financing.