The CLEC Experiment: Anatomy of a Meltdown
27 Pages Posted: 30 Aug 2008
Date Written: September 2002
In this paper, we report on our analysis of data from the SEC reports of 24 publicly traded competitive local exchange carriers (CLECs) for the years 1996-2001. Our focus is on the sources and uses of cash. Cash was raised mainly by issuing common and preferred stock and by borrowing. Collectively, the firms in our sample raised $43 billion during the five years following the Telecommunications Act. Only one of the 24 turned a profit, and all but seven have either declared bankruptcy or been acquired (generally at a steep discount) by other firms. In these respects, our sample is, unfortunately, quite representative of the "meltdown" of the CLEC sector as a whole.
Our purpose in undertaking this analysis is to contribute to a better understanding of "what went wrong" with the CLECs. Such an understanding is important for two reasons. Our analysis tends to support theories of the CLEC meltdown associated with the failures of managers and investors to make wise choices about operations of their firms and the allocation of their investments. While we find little if any support for the notion that more aggressive regulation could have "saved" the CLECs, we do find some indication that firms and investors may have been influenced in their behavior by excessive reliance on regulatory incentives.
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