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Capital Structure with Countervailing Incentives

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  • Spiegel, Y.
  • Spulber, D.F.

Abstract

The regulated firm's choice of capital structure is affected by countervailing incentives: the firm wishes to signal high value to capital markets to boost its market value while also signalling high cost to regulators to induce rate increases. When the firm's investment is large, countervailing incentives lead both high- and low-cost firms to choose the same capital structure in equilibrium, thus decoupling capital structure from private information. When investment is small or medium-sized, the model may admit separating equilibria in which high-cost firms issue greater equity and low-cost firms rely more on debt financing.

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Bibliographic Info

Paper provided by Bell Communications - Economic Research Group in its series Papers with number 93.

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Length: 36 pages
Date of creation: 1993
Date of revision:
Handle: RePEc:fth:bellco:93

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Postal: Bell Communications Research; Economic Research Group, 445 South street Morristown, NJ 07962-1910, USA

Related research

Keywords: investments;

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Cited by:
  1. Georges Assaf, A. & Gillen, David, 2012. "Measuring the joint impact of governance form and economic regulation on airport efficiency," European Journal of Operational Research, Elsevier, vol. 220(1), pages 187-198.
  2. Pérez Montes, Carlos, 2013. "Regulatory bias in the price structure of local telephone service," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 462-476.
  3. Helder Valente, 2003. "Financial Strategies in Mergers and Acquisitions (M&A): The Case of Regulated Firms," CEF.UP Working Papers 0307, Universidade do Porto, Faculdade de Economia do Porto.
  4. Arve, Malin, 2013. "Procurement and Predation: Dynamic Sourcing from Financially Constrained Suppliers," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 441, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  5. Bernardo Bortolotti & Carlo Cambini & Laura Rondi & Yossi Spiegel, 2011. "Capital Structure and Regulation: Do Ownership and Regulatory Independence Matter?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(2), pages 517-564, 06.
  6. Spiegel, Yossef, 1997. "The choice of technology and capital structure under rate regulation," International Journal of Industrial Organization, Elsevier, vol. 15(2), pages 191-216, April.
  7. Clive J Stones, . "Risk Sharing, the Cost of Equity and the Optimal Capital Structure of the Regulated Firm," Discussion Papers 05/31, Department of Economics, University of York.
  8. Sanyal, Paroma & Bulan, Laarni T., 2011. "Regulatory risk, market uncertainties, and firm financing choices: Evidence from U.S. Electricity Market Restructuring," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(3), pages 248-268, June.
  9. James E. Prieger, 2003. "The Timing of Product Innovation and Regulatory Delay," Working Papers 19, University of California, Davis, Department of Economics.
  10. Lee, Gea M., 2010. "Optimal collusion with internal contracting," Games and Economic Behavior, Elsevier, vol. 68(2), pages 646-669, March.
  11. Lewis, Tracy R. & Sappington, David E. M., 1999. "Access pricing with unregulated downstream competition," Information Economics and Policy, Elsevier, vol. 11(1), pages 73-100, March.
  12. Carlos Pérez Montes, 2011. "Optimal capital structure and Regulatory Control," Banco de Espa�a Working Papers 1128, Banco de Espa�a.
  13. Maria Goltsman & Gregory Pavlov, 2008. "How to Talk to Multiple Audiences," UWO Department of Economics Working Papers 20081, University of Western Ontario, Department of Economics.
  14. Martimort, David & Poudou, Jean-Christophe & Sand-Zantman, Wilfried, 2009. "Contracting and Ideas Disclosure in the Innovation Process," TSE Working Papers 09-053, Toulouse School of Economics (TSE).
  15. Prieger, James E., 2007. "Regulatory delay and the timing of product innovation," International Journal of Industrial Organization, Elsevier, vol. 25(2), pages 219-236, April.
  16. Daniel Danau & Annalisa Vinella, 2012. "Public-private contracting under limited commitment," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201227, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  17. Gea M. Lee, 2004. "Collusion with Internal Contracting," Econometric Society 2004 Far Eastern Meetings 693, Econometric Society.
  18. James E. Prieger, 2005. "Endogenous Regulatory Delay and the Timing of Product Innovation," Working Papers 54, University of California, Davis, Department of Economics.

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