Capital Structure and Regulation in U.S. Local Telephony: An Exploratory Econometric Study

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Capital Structure and Regulation in U.S. Local Telephony: An Exploratory Econometric Study

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Marcelo Resende ()

Abstract

The paper aims at empirically investigating the relationship between regulation and the capital structure of the regulated firm, A key aspect of the referred relationship pertains a leverage effect according to which debt could be increased as a response to previous physical capital investment with an ultimate goal of inducing higher rates. Theoretical models like Spiegel and Spulber [1997, RAND Journal of Economics] highlight that effect. The present paper considers a panel data set of local exchange carriers-LECs in the U.S. and investigate Granger causality between changes in long-term debt (NDEBT) and gross investment (INV) in physical capital. The evidence accruing from a dynamic panel data estimation indicates an uni-directional causality from INV to NDEBT and therefore is, to a large extent, consistent with a leverage effect and with the notion that the size of the firm´s investment project can impose a restriction on the amount of new debt. The result prevails independent of a control variable that indicates the regulatory regime.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2681.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2681

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Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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