IDEAS home Printed from https://ideas.repec.org/p/fth/pennfi/14-75.html
   My bibliography  Save this paper

The Value of the Firm Under Regulation

Author

Listed:
  • Jeffrey F. Jaffe
  • Gershon Mandelker

Abstract

The basic theoretical relationships between the value of the firm and leverage were set forth by Modigliani and Miller (MM). Much work has tested the MM relationships empirically, including studies which used data from regulated industries. Gordon has stated that, because earnings before interest and taxes are not held constant in regulated industries, the MM formula used in empirical work is invalid. However, Elton-Gruber (EG) challenge Gordon’s statement. The present paper shows that both the Gordon and the EG formulae hold only under special conditions. Under "normal" conditions of demand, both formulae underestimate the value of the levered firm. We show that there is no a priori method of estimating the effect of leverage on the value of a regulated firm without knowledge of specific supply and demand conditions. As researchers do not usually know these conditions, the results of papers testing the MM propositions with data on regulated industries are ambiguous. General formulae for the discount rate and the valuation of a levered firm in a regulated industry are presented.

Suggested Citation

  • Jeffrey F. Jaffe & Gershon Mandelker, "undated". "The Value of the Firm Under Regulation," Rodney L. White Center for Financial Research Working Papers 14-75, Wharton School Rodney L. White Center for Financial Research.
    • Handle: RePEc:fth:pennfi:14-75
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mariko SHIMIZU, 2019. "Why do high ability people also suffer from money illusion? Experimental evidence of behavioral contradiction," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(1(618), S), pages 5-22, Spring.
    2. repec:agr:journl:v:1(618):y:2019:i:1(618):p:5-22 is not listed on IDEAS
    3. Javed Pervaiz & Teng Jian-Zhou & Junaid Masih, 2018. "Long Run Relationship between Selected Macroeconomic Indicators and Banking Sector in Pakistan," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(2), pages 67-81, February.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fth:pennfi:14-75. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Krichel (email available below). General contact details of provider: https://edirc.repec.org/data/rwupaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.