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Regulatory Climate and Electric Utility Capital Structure Decisions
Author(s) -
Rao Ramesh,
Moyer R. Charles
Publication year - 1994
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1994.tb00815.x
Subject(s) - capital structure , leverage (statistics) , bankruptcy , debt , electric utility , capital (architecture) , business , capital requirement , economics , microeconomics , finance , computer science , engineering , archaeology , machine learning , history , incentive , electrical engineering
A theoretical model of the role of regulatory climate in the capital structure decisions of regulated electric utilities is developed that indicates managers can mitigate the consequences of unfavorable regulation by increasing the proportion of debt in the capital structure. The increase in leverage is limited by increased bankruptcy risk with higher levels of debt. The model predicts that utilities will react to their regulatory climate by adjusting capital structure. This behavior may be an undesirable consequence of the regulatory process. Empirical support for the model, both cross sectional and over time, is provided.