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Optimal Capital Structure and Regulatory Control

56 Pages Posted: 8 Nov 2011  

Carlos Pérez Montes

Banco de España

Date Written: November 8, 2011

Abstract

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.

Keywords: Industrial regulation, capital structure, control rights, hold-up, bankruptcy

JEL Classification: L51, L52, G32, G33

Suggested Citation

Pérez Montes, Carlos, Optimal Capital Structure and Regulatory Control (November 8, 2011). Banco de Espana Working Paper No. 1128. Available at SSRN: https://ssrn.com/abstract=1956479 or http://dx.doi.org/10.2139/ssrn.1956479

Carlos Pérez Montes (Contact Author)

Banco de España ( email )

Alcala 48
Madrid 28014
Spain

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