CAPITAL STRUCTURE WITH COUNTERVAILING INCENTIVES

The regulated firm's choice of capital structure is affected by counte rvailing incentives: the firm wishes to signal high value to capital m arkets to boost its market value while also signalling high cost to re gulators to induce rate increases, When the firm's investment is large , countervailing incentives lead both high- and low-cost firms to choo se 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 f irms issue greater equity and low-cost firms rely more on debt financi ng.y