Evaluation of Different Approaches to Capital Structure Regulation
With the introduction of incentive regulation in many network industries, different approaches how to remunerate invested capital have been used. Under incentive regulation, many regula-tors remunerate the regulated asset base with a weighted average cost of capital (WACC) based on a pre-defined gearing, not considering individual capital structure at all. From a reg-ulator’s point of view, the aim is clear: Provide incentives to the firms to optimize their capital structure, i.e. finding the right balance between equity financing and debt. Taggert (1981) shows that rate-of-return regulation creates an incentive for regulated firms to alter their capi-tal structures in order to influence consumer prices. Spiegel and Spulber (1994) find that the firm chooses its equity and debt in order to affect the outcome of the regulatory process. As a hybrid model between WACC and individual capital structure, the German Regulator sets incentives for a certain capital structure by limiting the return on equity that can be incorpo-rated into network tariffs with a cap. However it has not been analyzed neither in theoretical nor in practical research which incentives are really created by this cap. To analyze the impact of different capital structure regulation mechanisms on the optimal capital structure, a static trade-off-theory model of capital structure is presented and the char-acteristics of several different approaches to capital structure regulation and their characteris-tics are analyzed. The results indicate that the overall effect of capital structure regulation is very important: In an ex-ante regulation setting, the consideration of individual capital struc-tures leads to higher equity ratios than the use of a benchmark-WACC. In this context, caps are an effective mean to set incentives for a predefined equity ratio. In an ex-post regulation where bankruptcy is merely a threat, it may be optimal to rely on extreme strategies solely financing with equity or debt.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
| Length: | 20 pages |
| Date of creation: | Apr 2012 |
| Date of revision: | Apr 2012 |
| Handle: | RePEc:dui:wpaper:1202 |
| Contact details of provider: | Postal: Universitätsstrasse 12, 45117 Essen Phone: 0201 - 183 3633 Fax: 0201 - 183 2292 Web page: http://www.ewl.wiwi.uni-due.de More information through EDIRC
|
No references listed on IDEAS
You can help add them by filling out this form.
This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.
When requesting a correction, please mention this item's handle: RePEc:dui:wpaper:1202. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Andreas Fritz)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.