Stock-price reaction to equity issues of utilities: the influence of regulatory climate

Abstract

Regulation of public utilities is pervasive in any modern economy. Regulation is designed to overcome the deficiencies of market discipline. The decisions of a regulatory agency have impacts for all parties concerned, namely, consumers, management, investors, and community. The economic impact of a regulatory agency has been deeply analyzed. Many researchers have studied the stock-price reaction to announcements of new issues of industrial and utility companies. We examine the stock-price reaction to the announcements of new equity of utilities attempting to operationalize several theoretic models explaining this reaction. Using an event-study method, this examination is conducted while explicitly controlling for the regulatory climate under which these utilities operate. The main findings are: (1) the reaffirmation that the price reaction of stocks of utilities is negative; and (2) no significant influence of regulatory regimes on the price reaction was detected. The second finding is quite unanticipated Some speculative explanations are offered for the absence of impact of regulatory climate. It appears that stock market participants are sophisticated enough to do their own 'due diligence' and do not consider the overseeing by state public service commissions as relevant for stock valuation. © 1997 John Wiley & Sons, Ltd.