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Regulatory Climate and Electrical Utility Capital Structure Decisions

Ramesh Rao () and R Charles Moyer

The Financial Review, 1994, vol. 29, issue 1, 97-124

Abstract: 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. Copyright 1994 by MIT Press.

Date: 1994
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Handle: RePEc:bla:finrev:v:29:y:1994:i:1:p:97-124