Yossef Spiegel

The Capital Structure of a Regulated Firm

We examine the equilibrium price, investment, and capital structure of a regulated firm using a sequential model of regulation. We show that the firms capital structure has a significant effect on the regulated price. Consequently, the firm chooses its equity and debt strategically to affect the outcome of the regulatory process. In equilibrium, the firm issues a positive amount of debt and the likelihood of bankruptcy is positive. Debt raises the regulated price, thus mitigating regulatory opportunism. However, underinvestment due to lack of regulatory commitment to prices persists in equilibrium.

Capital Structure with Countervailing Incentives

The regulated firms choice of capital structure is affected by countervailing incentives: the firm wishes to signal high value to capital markets to boost its market value while also signalling high cost to regulators to induce rate increases. When the firms investment is large, countervailing incentives lead both high- and low-cost firms to choose 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 firms issue greater equity and low-cost firms rely more on debt financing.

Managerial Compensation and Capital Structure

We investigate the interaction between financial structure and managerial compensation and show that risky debt affects both the probability of managerial replacement and the managers wage if he is retained by the firm. Our model yields a rich set of predictions, including the following: (i) The market values of equity and debt decrease if the manager is replaced; moreover, the expected cash flow affirms that retain their managers exceeds that affirms that replace their managers, (ii) Managers affirms with risky debt outstanding are promised lower severance payments (golden parachutes) than managers affirms that do not have risky debt. (Hi) Controlling for firms size, the leverage, managerial compensation, and cash flow of firms that retain their managers are positively correlated, (iv) Controlling for the firms size, the probability of managerial turnover and firm value are negatively correlated, (v) Managerial pay‐performance sensitivity is positively correlated with leverage, expected compensation, and expected cash flows.

The choice of technology and capital structure under rate regulation

This paper examines a regulated firms choice of technology. It presents a model in which regulatory opportunism induces the firm to adopt a technology that gives rise to cost functions with higher variable costs and lower fixed costs than is socially optimal. This distortion arises because the regulated price is positively correlated with marginal costs. Consequently, a technology with low marginal costs implies a low regulated price and hence is unattractive to the firm. Debt financing is shown to alleviate this distortion because it induces regulators to increase the regulated price to prevent the firm from financial distress, thereby reducing the cost to the firm of adopting technologies with low marginal costs. When regulators restrict the firms ability to issue debt, the firm may have an incentive to goldplate (i.e. waste resources). This incentive disappears when the firm can use its most preferred mode of financing.

On the Evolutionary Emergence of Optimism

Successful individuals were frequently found to be overly optimistic. These finding are puzzling, as one could expect that realists would perform best in the long run. We show, however, that in a large class of strategic interactions of either cooperation or competition, the equilibrium payoffs of optimists may be higher than those of realists. This is because the very fact of being optimistic changes the game, and drives the adversary to change her equilibrium behavior, possibly to the benefit of the optimist.

Price and non-price restraints when retailers are vertically differentiated

This paper considers vertical restraints in the context of an intrabrand competition model in which a single manufacturer deals with two vertically differentiated retailers. We establish two main results. First, we show that if the market cannot be vertically segmented, the manufacturer will foreclose the low quality retailer either directly by dealing exclusively with the high quality retailer, or indirectly by setting a sufficiently high minimum RPM or a sufficiently high wholesale price. Although vertical restraints are not needed to foreclosure the low quality retailer, the manufacturer prefers to impose restraints because they lead to a higher retail price and hence a higher profit. This result means that exclusive dealings with the high quality retailer or an RPM may have anti competitive effects. Moreover, the use of vertical restraints to foreclose low quality retailers is often justified on the grounds that it alleviates a free rider problem in the provision of special services. However since we show that foreclosure occurs even without restraints, it is clear that the benefits associated with foreclosure cannot be used to justify the use of vertical restraints. Second, we show that if the market can be vertically segmented, the manufacturer will impose customer restrictions by requiring the low quality retailer to deal only with consumers whose willingness to pay for quality is below some threshold. We show that this restriction benefits the manufacturer as well as consumers with low willingness to pay for quality, including some that are served by the high quality retailer, but it harms consumers with high willingness to pay for quality.