The Value of the Firm Under Regulation
The basic theoretical relationships between the value of the firm and leverage were set forth by Modigliani and Miller (MM). Much work has tested the MM relationships empirically, including studies which used data from regulated industries. Gordon has stated that, because earnings before interest and taxes are not held constant in regulated industries, the MM formula used in empirical work is invalid. However, Elton-Gruber (EG) challenge Gordon’s statement. The present paper shows that both the Gordon and the EG formulae hold only under special conditions. Under "normal" conditions of demand, both formulae underestimate the value of the levered firm. We show that there is no a priori method of estimating the effect of leverage on the value of a regulated firm without knowledge of specific supply and demand conditions. As researchers do not usually know these conditions, the results of papers testing the MM propositions with data on regulated industries are ambiguous. General formulae for the discount rate and the valuation of a levered firm in a regulated industry are presented.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (215) 898-7616
Fax: (215) 573-8084
Web page: http://finance.wharton.upenn.edu/~rlwctr/Email:
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:fth:pennfi:14-75. 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: (Thomas Krichel)
If references are entirely missing, you can add them using this form.