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Capital Structure of Regulated Firms

A series of papers emphasise that the capital structure of regulated firms plays an important role in rate regulation due to the interaction between investment and financial decisions of regulated firms and the pricing choices of regulators. The aim of this paper is, in the context of India, to examine the empirical robustness of certain propositions related to the ideas which have been addressed in the literature. The investigation indicates that empirical evidence in India is consistent with some important propositions in the literature: (i) regulation tends to create an incentive for regulated firms to increase their debt level, (ii) debt has a positive effect on the return on equity (ROE), and (iii) if a regulated firm?s investment is relatively large, it is inclined to be highly leveraged.

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