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 language | English |
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Pages (from-to) | 297-319 |
Number of pages | 23 |
Journal | Journal of Regulatory Economics |
Volume | 6 |
Issue number | 3 |
DOIs | |
State | Published - Sep 1994 |
Externally published | Yes |