The capital structure of a regulated firm

Yossef Spiegel, Daniel F. Spulber

Research output: Contribution to journalArticlepeer-review

64 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)424-440
Number of pages17
JournalRAND Journal of Economics
Volume25
Issue number3
DOIs
StatePublished - Jan 1 1994

ASJC Scopus subject areas

  • Economics and Econometrics

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