DP7100 Capital Structure and Regulation: Do Ownership and Regulatory Independence Matter?

Author(s): Bernardo Bortolotti, Carlo Cambini, Laura Rondi, Yossi Spiegel
Publication Date: December 2008
Keyword(s): capital structure, leverage, private and state ownership, Regulated utilities, regulatory agencies, regulatory independence
JEL(s): G31, G32, L33
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=7100

We construct a comprehensive panel data of 92 publicly traded European utilities over the period 1994-2005 in order to study the relationship between capital structure, regulated prices, and firm value, and examine if and how this interaction is affected by ownership structure and regulatory independence. We show that regulated firms in our sample tend to have a higher leverage if they are privately-controlled and if they are regulated by an independent regulatory agency. Moreover, we find that the leverage of these firms has a positive and significant effect on their regulated prices, but not vice versa, and it also has a positive and significant effect on their market values. Our results are consistent with the theory that privately-controlled firms use leverage strategically to shield themselves against regulatory opportunism.