Required Return on Public Utility Equities: A National and Regional Analysis, 1958-1969
Volume: Volume 2, No. 2
Issue: Autumn 1971
Pages: pp. 503-514
Authors: John G. McDonald
Title: Required Return on Public Utility Equities: A National and Regional Analysis, 1958-1969
Abstract: In this paper a share-price model is derived from capital market equilibrium conditions. The effect of the time configuration of expected growth in earnings and investment on the specification of the valuation model is demonstrated. An econometric model is developed and applied to cross-sectional data to estimate the required rate of return on equities of electric and gas utilities. An iterative least-squares procedure is proposed for handling the value of growth in models of this form, whereby the non-linearity among the parameters in the valuation model is explicitly recognized. Estimates of required rates of return on equities are obtained for a national utility sample in 1958-1969 and for firms in four regional sectors in 1963-1969. The estimated rates tend to move synchronously with bond yields over the twelve-year period, with a mean value approximately one percentage point larger than the interest rate on high grade utility bonds.