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

Author

Listed:
  • An-Sing Chen

    (National Chung Cheng University, Taiwan)

  • Pham Tuan Anh

    (National Chung Cheng University, Taiwan and Nguyen Tat Thanh University, Vietnam)

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.

Suggested Citation

  • An-Sing Chen & Pham Tuan Anh, 2019. "The Effect of Deregulation on Firm Leverage and Strategic Behavior: Evidence from U.S. Electricity Industry," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 69(5), pages 489-507, October.
    • Handle: RePEc:fau:fauart:v:69:y:2019:i:5:p:489-507
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    File URL: http://journal.fsv.cuni.cz/mag/article/show/id/1445
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    Cited by:

    1. Simone Di Leo & Marta Chicca & Cinzia Daraio & Andrea Guerrini & Stefano Scarcella, 2022. "A Framework for the Analysis of the Sustainability of the Energy Retail Market," Sustainability, MDPI, vol. 14(12), pages 1-28, June.

    More about this item

    Keywords

    electricity deregulation; financial leverage; competitive level; market shares; strategic behavior;
    All these keywords.

    JEL classification:

    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • O51 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - U.S.; Canada
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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