Risk Sharing, the Cost of Equity and the Optimal Capital Structure of the Regulated Firm

Clive Stones ()

Review of Industrial Organization, 2007, vol. 30, issue 2, 139-159

Abstract: This paper considers the relationship between the regulator’s pricing decision and the allocation of risk between consumers and shareholders. Consumers are willing to trade-off price variations against a lower expected price. Prices are higher in adverse economic conditions, but shareholder returns are not necessarily lower. It might be optimal to insure shareholders against market risk, so that consumers could thereby achieve a lower expected price. The allocation of risk between consumers and shareholders depends on the capital structure of the regulated firm, and a very special set of conditions must apply for the social optimum to be 100% debt finance with the firm operating on a ‘not-for-profit’ basis. Copyright Springer Science+Business Media, LLC 2007

Keywords: Capital structure; Cost of equity; Debt finance; Leverage; Regulation; Risk; G32; G38; L51 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:revind:v:30:y:2007:i:2:p:139-159

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DOI: 10.1007/s11151-007-9131-2

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