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Optimal capital structure and Regulatory Control

Author

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  • Carlos Pérez Montes

    () (Banco de España)

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.

Suggested Citation

  • Carlos Pérez Montes, 2011. "Optimal capital structure and Regulatory Control," Working Papers 1128, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:1128
    as

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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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    References listed on IDEAS

    as
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    More about this item

    Keywords

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

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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