The capital structure and investment of regulated firms under alternative regulatory regimes

Yossef Spiegel*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This paper explains how regulated firms choose their capital structure and examines the effects of this choice on investment and on regulated prices. It is shown that in equilibrium, firms have an optimal debt level and that given this debt level, the regulated price is set high enough to ensure that firms never become financially distressed. The analysis of the equilibrium yields testable hypotheses concerning the effects of changes in cost parameters and in the regulatory climate on the equilibrium investment level, capital structure, and regulated price. The analysis also shows that a regulatory restriction on the ability of the firm to issue securities may have an adverse effect on investment and consequently may harm consumers.

Original languageEnglish
Pages (from-to)297-319
Number of pages23
JournalJournal of Regulatory Economics
Volume6
Issue number3
DOIs
StatePublished - Sep 1994
Externally publishedYes

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