Capital Structure and Regulation in U.S. Local Telephony: an Exploratory Econometric Study

Marcelo Resende

Economics Bulletin, 2010, vol. 30, issue 1, 392-404

Abstract: The paper aims at empirically investigating the relationship between regulation and the capital structure of the regulated firm, A key aspect of the referred relationship pertains a leverage effect according to which debt could be increased as a response to previous physical capital investment with an ultimate goal of inducing higher rates. Theoretical models like Spiegel and Spulber [1997, RAND Journal of Economics] highlight that effect. The present paper considers a panel data set of local exchange carriers-LECs in the U.S. and investigate Granger causality between changes in long-term debt (NDEBT) and gross investment (INV) in physical capital. The evidence accruing from a dynamic panel data estimation indicates an uni-directional causality from INV to NDEBT and therefore is, to a large extent, consistent with a leverage effect and with the notion that the size of the firm´s investment project can impose a restriction on the amount of new debt. The result prevails independent of a control variable that indicates the regulatory regime.

Keywords: regulation; capital structure; dynamic panel data (search for similar items in EconPapers)
JEL-codes: G3 L5 (search for similar items in EconPapers)
Date: 2010-01-28
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Working Paper: Capital Structure and Regulation in U.S. Local Telephony: An Exploratory Econometric Study (2009)
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