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The Capital Structure of a Regulated Firm

Yossef Spiegel and Daniel F. Spulber
The RAND Journal of Economics
Vol. 25, No. 3 (Autumn, 1994), pp. 424-440
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/2555770
Page Count: 17
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The Capital Structure of a Regulated Firm
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Abstract

We examine the equilibrium price, investment, and capital structure of a regulated firm using a sequential model of regulation. We show that the firm's capital structure has a significant effect on the regulated price. Consequently, the firm chooses its equity and debt strategically to affect the outcome of the regulatory process. In equilibrium, the firm issues a positive amount of debt and the likelihood of bankruptcy is positive. Debt raises the regulated price, thus mitigating regulatory opportunism. However, underinvestment due to lack of regulatory commitment to prices persists in equilibrium.

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