An examination of regulatory regime and public utility underwriting costs from an agency perspective

Abstract

We examine from an agency-theoretic perspective the flotation costs incurred by public utilities, contending that the conflicts of interests among managers, owners, utility commissions, and consumers would be manifested in a negative relationship between the regulatory climate and flotation costs. Several hypotheses are tested using a sample of 538 seasoned equity issues of public utilities during the period 1973 through 1980. Contrary to our expectations, however, we find that the stringency (strictness) of regulatory climate is positively related to flotation costs. We offer some plausible explanations for the counter-intuitive results.