Does Utility Regulation Substitute for Debt Covenants?

30 Pages Posted: 4 Sep 2009

See all articles by Ervin L. Black

Ervin L. Black

Steed School of Accounting

Thomas A. Carnes

Berry College - Campbell School of Business

Joshua Mallett

affiliation not provided to SSRN

Michael Mosebach

University of Akron - The George W. Daverio School of Accountancy

Date Written: September 1, 2009

Abstract

Governmental regulation and debt covenants both restrict a firm’s choices. We hypothesize that state-level regulation of utility companies will substitute for debt covenants and test this by examining the use of such covenants in publicly-held debt between 1985 and 2003. In general, our findings support this hypothesis. We find that debt covenants (except effective maturity covenants) occur in fewer utility company debt issues than for a matched sample of non-utilities. However, we find that the variability in the level of state regulation only affects the use of financing debt covenants by utilities, suggesting that the credit market considers state regulation to be homogenous for most other debt covenants despite differing state ratings. We also find some differences in debt covenant usage by type of utility: gas or electric.

Keywords: debt covenants, utilities

JEL Classification: L95

Suggested Citation

Black, Ervin L. and Carnes, Thomas A. and Mallett, Joshua and Mosebach, Michael, Does Utility Regulation Substitute for Debt Covenants? (September 1, 2009). Available at SSRN: https://ssrn.com/abstract=1466259 or http://dx.doi.org/10.2139/ssrn.1466259

Ervin L. Black

Steed School of Accounting ( email )

307 W Brooks
Norman, OK 73019
United States
405-325-2401 (Phone)

Thomas A. Carnes

Berry College - Campbell School of Business ( email )

2277 Martha Berry Hwy NW
Mount Berry, GA 30149
United States

Joshua Mallett

affiliation not provided to SSRN

Michael Mosebach (Contact Author)

University of Akron - The George W. Daverio School of Accountancy ( email )

United States

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