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Optimal capital structure and Regulatory Control

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  • Carlos Pérez Montes

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    (Banco de España)

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    Abstract

    This article studies how the managers of a regulated firm can use debt and equity contracts to constrain the regulator’s policy through the contingent transfer of control to external investors with high relative liquidation value. External finance increases regulated income and facilitates investment, but managers generally choose socially excessive levels of outside funds. If bankruptcy law favors reorganization over liquidation, the managers’s value of debt for a given investment level decreases. In the presence of income risk, regulatory ex ante commitment can increase the firm’s value if the regulator’s preference for continuation is high relative to that of managers.

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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/11/Fich/dt1128e.pdf
    File Function: First version, November 2011
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    Bibliographic Info

    Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1128.

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    Length: 58 pages
    Date of creation: Nov 2011
    Date of revision:
    Handle: RePEc:bde:wpaper:1128

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    Related research

    Keywords: Industrial regulation; capital structure; control rights; hold-up; bankruptcy;

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    2. Jean Tirole & Jean-Jaques Laffont, 1985. "Using Cost Observation to Regulate Firms," Working papers 368, Massachusetts Institute of Technology (MIT), Department of Economics.
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    4. Antoine Faure-Grimaud, 1997. "The Regulation of Predatory Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 425-451, 06.
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    8. Antoine Faure-Grimaud, 1997. "The Regulation of Predatory Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 849-876, December.
    9. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-59, April.
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    12. Michael C. Jensen, 1991. "Corporate Control And The Politics Of Finance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(2), pages 13-34.
    13. Yossef Spiegel & Daniel F. Spulber, 1991. "The Capital Structure of Regulated Firms," Discussion Papers 942, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    14. Spiegel, Yossef, 1994. "The Capital Structure and Investment of Regulated Firms under Alternative Regulatory Regimes," Journal of Regulatory Economics, Springer, vol. 6(3), pages 297-319, September.
    15. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
    16. Aghion, Philippe & Bolton, Patrick, 1992. "An Incomplete Contracts Approach to Financial Contracting," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 473-94, July.
    17. Altman, Edward I, 1984. " A Further Empirical Investigation of the Bankruptcy Cost Question," Journal of Finance, American Finance Association, vol. 39(4), pages 1067-89, September.
    18. Thakor, Anjan V, 1996. " Capital Requirements, Monetary Policy, and Aggregate Bank Lending: Theory and Empirical Evidence," Journal of Finance, American Finance Association, vol. 51(1), pages 279-324, March.
    19. Baron, David P., 1989. "Design of regulatory mechanisms and institutions," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 24, pages 1347-1447 Elsevier.
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