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Regulation, renegotiation and capital structure: theory and evidence from Latin American transport concessions

Moore, Alexander, Straub, Stéphane and Dethier, Jean-Jacques (2014) Regulation, renegotiation and capital structure: theory and evidence from Latin American transport concessions. Journal of Regulatory Economics, 45 (2). pp. 209-232. ISSN 0922-680X

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Identification Number: 10.1007/s11149-013-9243-6

Abstract

We examine the capital structure of regulated infrastructure firms. We develop a model showing that leverage, the ratio of liabilities to assets, is lower under high-powered regulation and that firms operating under high-powered regulation make proportionally larger reductions in leverage when the cost of debt increases. We test the predictions of the model using an original panel dataset of 124 transport concessions in Brazil, Chile, Colombia and Peru over 1992–2011. For each concession we have data on the regulatory regime, annual financial performance and contract renegotiations. We begin by demonstrating that, although pervasive, contract renegotiations do not fundamentally alter the regulatory regime. Importantly, firms are not systematically able to renegotiate when in financial difficulty, implying that price cap contracts remain high-powered in practice. We use this result for our main empirical work, where we find broad support for our theoretical predictions: when the cost of debt increases, firms operating under high-powered regulation make proportionally larger reductions in leverage.

Item Type: Article
Official URL: http://www.springer.com/economics/industrial+organ...
Additional Information: © 2014 Springer, Part of Springer Science+Business Media
Divisions: Economics
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HE Transportation and Communications
H Social Sciences > HG Finance
J Political Science > JL Political institutions (America except United States)
JEL classification: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation
N - Economic History > N2 - Financial Markets and Institutions > N26 - Latin America; Caribbean
Sets: Departments > Economics
Date Deposited: 18 Feb 2014 10:17
Last Modified: 30 Jan 2019 19:30
URI: http://eprints.lse.ac.uk/id/eprint/55707

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