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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.

Suggested Citation

  • Carlo Cambini & Laura Rondi, 2012. "Capital structure and investment in regulated network utilities: evidence from EU telecoms," Industrial and Corporate Change, Oxford University Press, vol. 21(1), pages 31-71, February.
  • Handle: RePEc:oup:indcch:v:21:y:2012:i:1:p:31-71
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    File URL: http://hdl.handle.net/10.1093/icc/dtr035
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    Cited by:

    1. Carlo Cambini & Laura Rondi & Yossi Spiegel, 2012. "Investment and the Strategic Role of Capital Structure in Regulated Industries: Theory and Evidence," Chapters,in: Recent Advances in the Analysis of Competition Policy and Regulation, chapter 13 Edward Elgar Publishing.
    2. Palcic, Dónal & Reeves, Eoin, 2013. "Private equity leveraged buyouts in European telecoms: The case of Eircom," Telecommunications Policy, Elsevier, vol. 37(6), pages 573-582.
    3. Carlo Cambini & Elena Fumagalli & Laura Rondi, 2016. "Incentives to quality and investment: evidence from electricity distribution in Italy," Journal of Regulatory Economics, Springer, vol. 49(1), pages 1-32, February.
    4. Howell, Bronwyn & Sadowski, Bert, 2014. "Anatomy of a Public-Private Partnership: Hold-up and regulatory risk in an NGN PPP," 20th ITS Biennial Conference, Rio de Janeiro 2014: The Net and the Internet - Emerging Markets and Policies 106872, International Telecommunications Society (ITS).
    5. 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.
    6. Chalmeau, Olivier, 2013. "Determinants of European telecommunication operators systematic risk," 24th European Regional ITS Conference, Florence 2013 88495, International Telecommunications Society (ITS).
    7. Montolio Daniel & Trillas Francesc & Trujillo-Baute Elisa, 2014. "Regulatory Environment and Firm Performance in EU Telecommunications Services," Review of Network Economics, De Gruyter, vol. 13(3), pages 271-302, September.
    8. Cambini, Carlo & Spiegel, Yossi, 2011. "Investment and capital structure of partially private regulated firms," CEPR Discussion Papers 8508, C.E.P.R. Discussion Papers.
    9. Majumdar, Sumit K., 2016. "Debt and communications technology diffusion: Retrospective evidence," Research Policy, Elsevier, vol. 45(2), pages 458-474.

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