Debt Decisions in Deregulated Industries

Regulation and subsequent deregulation significantly affect firms' debt decisions. Prior to deregulation, regulated firms depend significantly more on long-term and public debt but reduce this dependence considerably during deregulation. Cross-sectional analysis shows that the reduction in the use of long-term and public debt results from changing firm sensitivities to determinants of debt decisions triggered by deregulation. Consistent with credit and liquidity risk theories of debt maturity, the concave relation between firm quality and debt maturity is significantly attenuated among regulated firms. Inconsistent with these theories, the convex relation between firm quality and the preference for public debt exists only among regulated firms. I find limited support for other theories