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Risk and Capital Structure in the Regulated Firm

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Abstract

This paper studies the role of capital structure in a regulated firm. We show that it affects the prices set by the regulator, the expected price being lower the higher the proportion of debt finance. However, when debt is increased beyond a certain level, the benefit of lower expected prices is offset by their increased variability. We also study the socially preferred capital structure. This is such that consumers carry some risk, in the form of higher prices in adverse economic conditions.

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Authors and Affiliations

  1. Department of Economics and Related Studies, University of York, Heslington, York, YO10 5DD, U.K.

    Gianni De Fraja & Clive Stones

  2. Università di Roma Tor Vergata and C.E.P.R, UK

    Gianni De Fraja

Authors
  1. Gianni De Fraja
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  2. Clive Stones
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De Fraja, G., Stones, C. Risk and Capital Structure in the Regulated Firm. Journal of Regulatory Economics 26, 69–84 (2004). https://doi.org/10.1023/B:REGE.0000028014.01009.ed

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  • DOI: https://doi.org/10.1023/B:REGE.0000028014.01009.ed

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