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Effects of Regulation on Utility Financing: Theory and Evidence

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  • Robert A. Taggart, Jr.
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    Abstract

    This paper examines the financing decisions of regulated public utilities. It is argued that the regulatory process affects utility financing choices both by conditioning the environment in which these choices are made and by creating opportunities for firms to influence the regulated price through strategic financing behavior. The nature of this regulatory effect continually changes, however, as economic conditions change and as regulators, firms and consumers adapt to one another's decisions. The direction of the impact on utility financing, therefore, may differ both over time and across regulatory jurisdictions. This theory of regulatory influence is tested by examining several episodes in the financing experience of U.S. electric utilities from 1912 to 1979. Evidence of a regulatory effect on utility financing is found particularly for the early years of state commission regulation. Examples of an adaptive response pattern on the part of regulators, firms and consumers are also cited.

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    File URL: http://www.nber.org/papers/w0866.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0866.

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    Date of creation: Mar 1982
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    Publication status: published as Taggart, Robert A. "Effects of Regulation on Utility Financing: Theory and Evidence." Journal of Industrial Economics, Vol. 33, No. 3, (March 1985) , pp. 257-276.
    Handle: RePEc:nbr:nberwo:0866

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    1. Jarrell, Gregg A, 1978. "The Demand for State Regulation of the Electric Utility Industry," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 21(2), pages 269-95, October.
    2. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 147-175, November.
    3. Thomas F. Cargill & Thomas Mayer, 1992. "U.S. Deposit Insurance Reform," Contemporary Economic Policy, Western Economic Association International, Western Economic Association International, vol. 10(3), pages 95-103, 07.
    4. Taggart, Robert A, Jr, 1977. "A Model of Corporate Financing Decisions," Journal of Finance, American Finance Association, American Finance Association, vol. 32(5), pages 1467-84, December.
    5. Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, Elsevier, vol. 1(1), pages 3-11, June.
    6. Robichek, Alexander A, 1978. "Regulation and Modern Finance Theory," Journal of Finance, American Finance Association, American Finance Association, vol. 33(3), pages 693-705, June.
    7. Elton, Edwin J & Gruber, Martin J, 1971. "Valuation and the Cost of Capital for Regulated Industries," Journal of Finance, American Finance Association, American Finance Association, vol. 26(3), pages 661-70, June.
    8. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
    9. Buser, Stephen A & Chen, Andrew H & Kane, Edward J, 1981. "Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of Finance, American Finance Association, American Finance Association, vol. 36(1), pages 51-60, March.
    10. Roger H. Gordon & Burton G. Malkiel, 1980. "Taxation and Corporation Finance," NBER Working Papers 0576, National Bureau of Economic Research, Inc.
    11. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, Elsevier, vol. 8(1), pages 3-29, March.
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    Cited by:
    1. 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, Wiley Blackwell, vol. 20(2), pages 517-564, 06.
    2. J. Cummins & Neil Doherty, 2002. "Capitalization of the Property-Liability Insurance Industry: Overview," Journal of Financial Services Research, Springer, Springer, vol. 21(1), pages 5-14, February.
    3. Clive Stones, 2007. "Risk Sharing, the Cost of Equity and the Optimal Capital Structure of the Regulated Firm," Review of Industrial Organization, Springer, Springer, vol. 30(2), pages 139-159, March.
    4. Strauss, Jason David, 2008. "The financial leverage of Insurers subject to price regulation: evidence from Canada," MPRA Paper 10845, University Library of Munich, Germany.
    5. Robert Klein & Richard Phillips & Wenyan Shiu, 2002. "The Capital Structure of Firms Subject to Price Regulation: Evidence from the Insurance Industry," Journal of Financial Services Research, Springer, Springer, vol. 21(1), pages 79-100, February.

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