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Volume 69, Issue 5

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The Effect of Deregulation on Firm Leverage and Strategic Behavior: Evidence from U.S. Electricity Industry

Anh, Pham Tuan ; Chen, An-Sing

Year: 2019   Volume: 69   Issue: 5   Pages: 489-507

Abstract: We examine the relationship between financial leverage, competition, and the strategic behavior of U.S. electricity firms under the dynamic GMM model framework. The GMM provides a framework to address the endogeneity in the leverage-competition relationship. We find that electricity deregulation induces private firms to increase financial leverage. Large and small levered firms exhibit different behaviors under the higher competitive conditions resulting from deregulation exogenous shocks. Highly levered large firms apply aggressive strategies through increasing the investment activities but slightly decreasing their retail prices, resulting in lower profit margins but drastically gaining more market share. On the other hand, small firms with higher leverage follow survival strategies to maintain their customer base at the expense of profit margins by investing more and charging higher prices after deregulation.

JEL classification: C36, C58, D22, G30, O51, Q40

Keywords: electricity deregulation, financial leverage, competitive level, market shares, strategic behavior

RePEc: xxx

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