Inflation, Regulation, and Utility Stock Prices
Volume: Volume 7, No. 1
Issue: Spring 1976
Pages: pp. 268-280
Authors: Michael W. Keran
Title: Inflation, Regulation, and Utility Stock Prices
Abstract: The attempt by regulatory authorities to maintain a constant nominal rate of return to utilities on the historic cost of capital will, in a period of accelerating inflation, lead to decline in the real rate of return. Efficient markets theory implies that investors would recognize this and in a period of inflation treat utility stocks as fixed coupon securities. They would systematically bid down the price of utility stocks relative to nonregulated industrial stocks in much the same way investors have bid down the price of bonds relative to stocks. The evidence presented indicates that such systematic repricing has occurred since inflation accelerated in the mid-1960s.
JEL Classification
Inflation and Deflation General (1340)
Capital Markets Empirical Studies, Including Regulation (3132)
Regulation of Public Utilities (6130)