The Choice Among Long‐Term Financing Instruments for Public Utilities

Abstract

AbstractThis study examines the decision of regulated utilities to raise new financing via common stock, debt, or preferred stock offerings. We develop several logit models to test how a set of relevant variables affects the issuing choice. These variables include the level of insider ownership, regulatory climates, measures of aggregate market conditions, bankruptcy risk, deviations from the long‐and short‐term target ratios, asset composition, etc. In addition, this paper tests whether the cross‐sectional level of debt ratio is related to some of these same factors. Our findings indicate that U.S. electric utilities are not influenced by market timing when making a choice among long‐term financing instruments. However, our results do show that ownership structure variables, such as the number of directors and officers, seem to have a significant negative influence upon the choice of common stock, thus lending support to Friend and Lang's finding. In addition, capital structure seems to matter for utilities.