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Capital structure and investment in regulated network utilities: evidence from EU telecoms

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  • Carlo Cambini
  • Laura Rondi

Abstract

This article analyzes the relationship between firm financial and investment decisions and regulatory outcomes in network industries, where regulatory opportunism is often viewed to lead to underinvestment. We develop a model to describe the effect of an increase in leverage on regulated rates, retail as well as wholesale , and company investment. We then test the model's predictions using a panel of 15 EU Public Telecommunication Operators (PTOs) over the period 1994--2005. Our results show that the data cannot reject the model's predictions that leverage positively affects regulated wholesale and retail rates, as well as the PTOs' investment rate. Moreover, since leverage does affect wholesale charges that alternative operators pay to access to the incumbent's network infrastructure, we also find that an increase in leverage is followed by a decrease in the number of competitors and by an increase of the incumbent's market share. This suggests that the use of debt to discipline the regulator's lack of commitment within a vertically integrated network industry may somewhat impair or delay retail market competition, but has a favorable counterpart in mitigating the underinvestment problem. Copyright 2012 The Author 2011. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved., Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/icc/dtr035
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Bibliographic Info

Article provided by Oxford University Press in its journal Industrial and Corporate Change.

Volume (Year): 21 (2012)
Issue (Month): 1 (February)
Pages: 31-71

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Handle: RePEc:oup:indcch:v:21:y:2012:i:1:p:31-71

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Cited by:
  1. Gugler, Klaus & Rammerstorfer, Margarethe & Schmitt, Stephan, 2013. "Ownership unbundling and investment in electricity markets — A cross country study," Energy Economics, Elsevier, vol. 40(C), pages 702-713.
  2. Cambini, Carlo & Spiegel, Yossi, 2011. "Investment and capital structure of partially private regulated firms," CEPR Discussion Papers 8508, C.E.P.R. Discussion Papers.
  3. Chalmeau, Olivier, 2013. "Determinants of European telecommunication operators systematic risk," 24th European Regional ITS Conference, Florence 2013 88495, International Telecommunications Society (ITS).
  4. Daniel Montolio & Francesc Trillas & Elisa Trujillo-Baute, 2014. "Regulatory environment and firm performance in EU telecommunications services," Working Papers 2014/15, Institut d'Economia de Barcelona (IEB).

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