Capital Structure with Countervailing Incentives

RAND J. OF ECONOMICS, Vol. 28 No. 1

Posted: 3 Mar 1997

See all articles by Yossi Spiegel

Yossi Spiegel

Tel Aviv University, Coller School of Management; Centre for Economic Policy Research (CEPR); ZEW – Leibniz Centre for European Economic Research

Daniel F. Spulber

Northwestern University - Kellogg School of Management

Abstract

The regulated firm's choice of capital structure is affected by countervailing incentives: the firm wishes to signal high value to capital markets to boost its market value while also signaling high cost to regulators to induce rate increases. When the firm's investment is large, countervailing incentives lead both high- and low-cost firms to choose the same capital structure in equilibrium, thus decoupling capital structure from private information. When investment is small or medium-sized, the model may admit separating equilibria in which high-cost firms issue greater equity and low-cost firms rely more on debt financing.

JEL Classification: G31, G32, L51

Suggested Citation

Spiegel, Yossi and Spulber, Daniel F., Capital Structure with Countervailing Incentives. RAND J. OF ECONOMICS, Vol. 28 No. 1. Available at SSRN: https://ssrn.com/abstract=8153

Yossi Spiegel

Tel Aviv University, Coller School of Management ( email )

Ramat Aviv, Tel Aviv, 69978
Israel
972-3-640-9063 (Phone)
972-3-640-7739 (Fax)

HOME PAGE: http://www.tau.ac.il/~spiegel

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Daniel F. Spulber (Contact Author)

Northwestern University - Kellogg School of Management ( email )

Kellogg Global Hub
2211 Campus Dr.
Evanston, IL 60208
United States
847-491-8675 (Phone)
847-467-1777 (Fax)

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