We study the effect of the establishment of independent regulatory agencies on the market-to-book
ratios of publicly traded European regulated firms observed from 1994 to 2005. We find that
independent regulation in combination with residual State ownership positively affects the market
value of regulated firms while high leverage increases the market value of privately controlled firms.
The positive relationship between firm value and the government’s stake is particularly strong and
significant in countries where political institutions do not constrain the power of the executive. We
conclude that where the institutional foundations of regulatory commitment are weak, the government
tends to affect the regulatory process in order to benefit State-owned firms.
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