Optimal Capital Structure and Regulatory Control
Carlos Pérez Montes
Bank of Spain
November 8, 2011
Banco de Espana Working Paper No. 1128
This article studies how the managers of a regulated firm can use debt and equity contracts to constrain the regulator’s policy through the contingent transfer of control to external investors with high relative liquidation value. External finance increases regulated income and facilitates investment, but managers generally choose socially excessive levels of outside funds. If bankruptcy law favors reorganization over liquidation, the managers’ value of debt for a given investment level decreases. In the presence of income risk, regulatory ex ante commitment can increase the firm’s value if the regulator’s preference for continuation is high relative to that of managers.
Number of Pages in PDF File: 56
Keywords: Industrial regulation, capital structure, control rights, hold-up, bankruptcy
JEL Classification: L51, L52, G32, G33
Date posted: November 8, 2011
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