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

23 Pages Posted: 29 Jun 2009

See all articles by Marcelo Resende

Marcelo Resende

Universidade Federal do Rio de Janeiro (UFRJ); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: June 2009

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

JEL Classification: G32, L51, L96

Suggested Citation

Resende, Marcelo, Capital Structure and Regulation in U.S. Local Telephony: An Exploratory Econometric Study (June 2009). CESifo Working Paper Series No. 2681, Available at SSRN: https://ssrn.com/abstract=1427145

Marcelo Resende (Contact Author)

Universidade Federal do Rio de Janeiro (UFRJ) ( email )

Rua Sao Francisco Xavier, 524
Instituto de Economia
Rio de Janeiro RJ 21949
Brazil

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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