A Note on the Relationship between Firm Size and Return in the Electric Utility Industry

Abstract

Prior research has argued that given the well-documented inverse relationship between firm size and market returns, smaller utilities should be allowed to earn higher accounting rates of return than larger utilities. To test the validity of this argument, this study investigated the relationship between firm size and market returns in the electric utility industry for the period 1962 through 1985 and found no evidence of either a positive or negative size effect. Moreover, although market returns on utility stocks were found to be higher in January than in non-January months, this January effect was found to be unrelated to firm size. In short, this study found no evidence that allowable accounting rates of return should be adjusted by regulatory authorities to reflect a firm's size.