Regulation, renegotiation and capital structure: theory and evidence from Latin American transport concessions
AbstractWe examine the capital structure of regulated infrastructure firms. We develop a model showing that leverage, the ratio of liabilities to assets, is lower under high-powered regulation and that firms operating under high-powered regulation make proportionally larger reductions in leverage when the cost of debt increases. We test the predictions of the model using an original panel dataset of 124 transport concessions in Brazil, Chile, Colombia and Peru over 1992–2011. For each concession we have data on the regulatory regime, annual financial performance and contract renegotiations. We begin by demonstrating that, although pervasive, contract renegotiations do not fundamentally alter the regulatory regime. Importantly, firms are not systematically able to renegotiate when in financial difficulty, implying that price cap contracts remain high-powered in practice. We use this result for our main empirical work, where we find broad support for our theoretical predictions: when the cost of debt increases, firms operating under high-powered regulation make proportionally larger reductions in leverage. Copyright Springer Science+Business Media New York 2014
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Bibliographic InfoArticle provided by Springer in its journal Journal of Regulatory Economics.
Volume (Year): 45 (2014)
Issue (Month): 2 (April)
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Web page: http://www.springerlink.com/link.asp?id=100298
Infrastructure; Regulation; Capital; Leverage ; Latin America; G11; L51; N26;
Other versions of this item:
- Moore, Alexander & Straub, Stephane & Dethier, Jean-Jacques, 2013. "Regulation, renegotiation and capital structure : theory and evidence from Latin American transport concessions," Policy Research Working Paper Series 6646, The World Bank.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- N26 - Economic History - - Financial Markets and Institutions - - - Latin America; Caribbean
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