Journal Article

Capital structure and investment in regulated network utilities: evidence from EU telecoms

Carlo Cambini and Laura Rondi

in Industrial and Corporate Change

Volume 21, issue 1, pages 31-71
Published in print February 2012 | ISSN: 0960-6491
Published online June 2011 | e-ISSN: 1464-3650 | DOI: https://dx.doi.org/10.1093/icc/dtr035
Capital structure and investment in regulated network utilities: evidence from EU telecoms

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This article analyzes the relationship between firm financial and investment decisions and regulatory outcomes in network industries, where regulatory opportunism is often viewed to lead to underinvestment. We develop a model to describe the effect of an increase in leverage on regulated rates, retail as well as wholesale, and company investment. We then test the model's predictions using a panel of 15 EU Public Telecommunication Operators (PTOs) over the period 1994–2005. Our results show that the data cannot reject the model's predictions that leverage positively affects regulated wholesale and retail rates, as well as the PTOs’ investment rate. Moreover, since leverage does affect wholesale charges that alternative operators pay to access to the incumbent's network infrastructure, we also find that an increase in leverage is followed by a decrease in the number of competitors and by an increase of the incumbent's market share. This suggests that the use of debt to discipline the regulator's lack of commitment within a vertically integrated network industry may somewhat impair or delay retail market competition, but has a favorable counterpart in mitigating the underinvestment problem.

Keywords: L51; G31; G32; L96

Journal Article.  16056 words.  Illustrated.

Subjects: Regulation and Industrial Policy ; Energy and Utilities ; Corporate Governance

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