Utility Firms Research Articles

Regulation and information asymmetry

PurposeThis paper seeks to examine the potential for regulation to reduce information asymmetries between firm insiders and outside investors.Design/methodology/approachExtensive prior research has established that there are substantial effects of information asymmetry in seasoned equity offers (SEOs). The paper tests for a mitigating effect of regulation on such information asymmetries by examining differences in long‐run operating performance, changes in that performance, and announcement‐period stock returns between unregulated industrial firms and regulated utilities that issue seasoned equity. The authors also segment the samples by firm size, since smaller firms are likely to have greater asymmetries.FindingsConsistent with regulated utility firms having lower levels of information asymmetry, they have superior changes in abnormal operating performance than industrial firms pre‐ to post‐issue and their announcement period returns are significantly less negative. These findings are most pronounced for the smallest firms, firms likely to have the greatest information asymmetries and where regulation could have its greatest effect.Research limitations/implicationsThe paper does not examine costs of regulation. Thus, future research could seek to measure the cost/benefit trade‐off of regulation in reducing information asymmetry. Also, future research could examine cross‐sectional differences between different industries and regulated utilities.Practical implicationsRegulation reduces information asymmetry. Thus, regulation or mandated disclosure may be appropriate in industries/markets where information asymmetry is severe.Originality/valueThis paper is the first to compare the operating performance of regulated and unregulated SEO firms.

Capital Gains and the Capital Asset Pricing Model

This paper shows that, in the presence of differential taxation of ordinary income and capital gains, use of the Officer (1994) version of the Capital Asset Pricing Model can result in significant misestimation of the cost of equity capital. In particular, with a high dividend yield, the cost of equity may be underestimated by four percentage points. Underestimation is of particular significance in the context of setting output prices for regulated utility firms.

Managerial motives for splitting stocks: Evidence from electric utility companies

Despite the rich literature on stock splits, studies have omitted public utility firms from their analysis when examining managerial motives for splitting stocks. In 1992 Congress enacted the Energy Policy Act (EPACT) to encourage the development of a competitive, national, wholesale electricity market. I argue that the change in the regulatory environment for public utilities provides a clean setting to study and compare the signaling and liquidity motivations for splitting stock. Before deregulation, the signaling motivation for splitting stocks is not applicable for these firms because the level of information asymmetry is low. Hence, the liquidity hypothesis should be the primary motivation for electric utilities to split stocks during this period. After deregulation, however, the signaling effect is expected to play a more dominant role because of higher level of information asymmetry. The results are consistent with the hypothesis posed. For the pre-EPACT period, liquidity motive seems to predominate in explaining the abnormal announcement return of utility stock splits. On the other hand, the results support the signaling motive as a leading explanation of abnormal returns in the post-EPACT period.

Deregulation, news releases, and price discovery

We hypothesize that the firm’s regulatory environment influences the sensitivity of its equity value to information. Using intraday stock price data of utilities operating in differing regulatory environments we test for systematic differences between the responsiveness of stock prices of utility firms operating in deregulated and regulated environments to a common information set. Our findings reveal sharp differences in responses, with those of utilities operating in deregulated environments the strongest, and the responses of utilities in highly regulated environments the weakest. While the evidence supports our hypothesis, in a broader sense, the evidence suggests that deregulation aids in the process of price discovery. We also find evidence that suggests that deregulation, per se, does not lead to higher stock price volatility.

Attracting for values: an empirical study of ASA's attraction proposition

PurposeThis paper seeks to report an empirical test of Schneider's attraction proposition that organizations attract similar types of people.Design/methodology/approachThe person‐people (PP), person‐group (PG) and person‐organization (PO) fit of applicants to eight utility firms were compared with the similar fits of members of a suitable comparison group.FindingsThe results show an effect for person‐vocation (PV) fit but, once this is controlled for, all significant effects disappear. In other words, the PP, PG and PO fits of applicants to the utilities were no different from those in the comparison group once PV fit was controlled for.Research limitations/implicationsThese results suggest that applicants choose which organization to apply to based on their desire for a particular type of work rather than their attraction for particular companies, which is contrary to Schneider's attraction proposition. One reason for this might be the nature of graduates who are largely unaware of the organizational environments to which they are applying. Drawing from the interpersonal attraction literature, it is argued that applicants need familiarity, proximity and exposure to the organization for Schneider's attraction proposition to appear.Practical implicationsThese results suggest graduates choose vocations over organizations and that, if organizations wish to attract people who share their values, they need to put more effort into their recruitment efforts than those described in this study. The absence of an attraction effect suggests that, when applicants make attraction decisions based on their perceived fit, they may not be supported by an actual congruence.Originality/valueThis study extends previous work by including multiple conceptualizations of fit, by including person‐group and person‐people fits in addition to person‐organization fit.

The abnormal performance of UK utility privatisations

PurposeThis paper aims to re‐examine both the short‐ and long‐term performance of UK privatisations, with specific reference to the comparative performance of utility privatisations with non‐utility privatisations and private sector initial public offerings (IPOs).Design/methodology/approachThe paper uses conventional event study methodology to examine the short‐ and long‐run comparative performance of IPOs. The long‐run analysis also adopts a buy‐and‐hold methodological approach.FindingsThe results reveal that short‐term under‐pricing is significantly higher in privatisations than in private sector firms, and specifically with the utility firms, and thus supports the hypothesis that governments tend to underprice privatisation issues more due to concerns over reassuring investors regarding potential future intervention. The long‐term results show that privatisations not only consistently out‐perform the benchmark index, but they also tend to out‐perform private sector firms. However, as with the short‐term analysis the results for the non‐utility firms are far less conclusive.Research limitations/implicationsThe paper illustrates that IPO performance of privatisations not only can differ from private sector issues, but the type of firm and the aims and objectives of the issuing government are a major factor in both the short‐ and long‐run performance of the firm.Practical implicationsThe results highlight the practical issues involved in the relative pricing of privatisations dependent on the type of firm involved.Originality/valueThe explicit separation of privatisation issues by industry type and the comparison with a private sector sample split by both industry sector and by market size.

Exploring supply chain opportunities in the UK utilities sector and the supporting role of eMarketplaces

PurposeSince the privatization of UK utilities, few studies have examined supply chain management (SCM) in the sector. This paper aims to investigate the state of development of the SCM concept and the role of the emerging internet‐based electronic marketplaces in supporting this.Design/methodology/approachUsing a case study method, interviews were conducted with managers in seven UK electricity and water utilities. Areas explored are the firms' supply chain priorities, how eMarketplaces can support their supply chain goals and the barriers to adoption of eBusiness solutions.FindingsThe research reveals a strong orientation in both the electricity and water industry firms towards controlling cost inputs. Consequently, their focus is on managing procurement as the primary supply chain activity. The key barriers to eBusiness adoption identified are the problem of providing genuine benefits to suppliers, and the technical difficulties of marketplace implementation.Research limitations/implicationsThis is an exploratory study of the domain and further work in this area needs to focus on how utilities will develop their supply chain competences and how eBusiness solutions can support them.Originality/valueThe research concludes that operators of electronic marketplaces have not yet delivered a convincing case for wider participation in management of the supply chain online. A stronger SCM orientation will need to emerge in utility firms before that can occur.

CEO Compensation after Deregulation: The Case of Electric Utilities*

The 1992 National Energy Policy Act (NEPA) intensified competition in the electric utility industry by allowing nonutility generators to produce and sell power in wholesale energy markets. Congress expected NEPA to lead to improved operating efficiencies by substituting market forces for regulation. A data set that is unique to the utility industry allows us to test how and whether utility firms reallocated resources to improve efficiencies and, more important for this study, whether CEO compensation changed in accordance with agency theory predictions that CEO compensation would become more incentive-based and more equity-based in the competitive operating environment.

Local government unit borrowing in Croatia: opportunities and constrains

The paper analyses the practice and basic features of local government unit borrowing in Croatia from 1997 to 2003. Local government units still rely on classical forms of loans as a form of security for resources for financing capital projects and there is little incentive for the issue of local government bonds. The borrowing conditions laid down are not a good basis on which to develop a local debt market or for facilitating local government borrowing. One of the reasons is also the dominant role of the city of Zagreb, which should be excluded from the establishment of budgetary restrictions on the borrowing of the other local government units in Croatia. Subsidised loans to local government units via the government financial institutions have been in some periods more expensive than via the commercial banks, and it is necessary to carry out a review of their role in the financing of local government unit capital projects. In any analysis of the borrowing and the size of the debt of local government units it is necessary to include the categories of financial assets as a better indicator of solvency and ability to repay debt. The article draws attention to a potential hold-up in the implementation of fiscal decentralisation, because local government units are investing some of their funds in the financial assets (shares and equity) of local utility firms.

Technological externalities and economies of vertical integration in the electric utility industry

This paper investigates economies of vertical integration of the electric utility industry, focusing on the technological externality between the generation and transmission–distribution stages. For this purpose, a shadow cost function of the symmetric generalized McFadden form is estimated using panel data on the transmission–distribution stage of nine Japanese electric utility firms. The results show that there exist the technological externality effects of generation facilities on the cost of the transmission–distribution stage, suggesting economies of vertical integration.

Cost of Equity and State Uncertainty

We propose a Bayesian framework to incorporate uncertainty about the state of the economy, and find that state uncertainty has economically significant effects on the estimation of the cost of equity. On average, a normal pricing model overestimates the cost of equity by 5% for utility firms, and 1.5% for industries. Consistent with Pastor and Stambaugh (1999), we find that the cost of equity is insensitive to mispricing uncertainty even in the presence of state uncertainty, but it is sensitive to state uncertainty regardless of the level of mispricing uncertainty. We also observe that the expected excess return, volatility, etc. display dynamics that coincide with the business cycles, and the latent state and the market predict the GDP growth rate six months ahead.

Managing information systems for service quality: a study from the other side

System quality, information quality, user IS characteristics, employee IS performance and technical support are identified as important elements that influence service quality. A model interrelating these constructs is proposed. Data collected through a national survey of IS departments in electric utility firms was used to test the model using regression and path analysis methodology. The results suggest that system quality, information quality, user IS characteristics, through their effects on employee IS performance, influence service quality, while technical support influences service quality directly. The results also suggest that employee IS performance contributes more to service quality compared with technical support. Implications of this research for IS theory and practice are discussed.

Does the Sequence of Seasoned Equity Offerings Matter?

We investigate the relation between announcement period returns and the sequence of seasoned equity offerings (SEOs) for industrial, financial, and utility firms making multiple offerings. For industrial firms, there is a monotonically positive relation between the returns and the sequence of issues. Further, the stock price reactions to the fourth and subsequent issues by industrial firms are insignificant. For firms that conduct at least two SEOs, there is no difference in returns between industrial firms and utilities or financial institutions. The lower negative returns for later announcements by industrial firms can be explained by reduced adverse selection costs.

Chief Executive Officer Careers in Regulated Environments: Evidence from Electric and Gas Utilities

We compare chief executive officers (CEOs) of electric and gas utility firms with CEOs of unregulated firms. Utility CEOs tend to be older when appointed to office, have less‐prestigious educational backgrounds, and are more likely to have a legal background. Despite these differences, the evidence indicates that the likelihood of utility CEO turnover is at least as sensitive to stock performance as the likelihood of turnover among CEOs of unregulated firms. We find no convincing evidence that utility CEOs stay in office longer than their unregulated counterparts, although they are less likely to be overtly forced from office or replaced by an executive from outside the firm. Finally, the evidence suggests that regulatory expertise is valued in the selection of new utility CEOs.

Derivative trading by utility firms

This paper examines the use of derivatives by a utility company. The hedging problem for utilities is atypical; the goal is not strictly to minimize average costs. Rather, the objectives are to minimize the upside risk associated with extreme bills, volatility of bills, and average expected bills for consumers. We characterize the optimal positions on futures contracts and options on futures that a utility company should assume. The results indicate that the use of derivatives (both futures and options on futures) is an efficient means of optimizing the objective functions without exposing consumers to speculative risk.

Organizational types and organizational innovation : Downsizing among industrial, financial, and utility firms

Given the importance of innovation to organizations and to society-at-large, scholars have asked: Why do organizations innovate? Institutionalists argue that the causes of innovation vary by organizational type: While technicoeconomic forces should trigger innovation among “efficiency-minded” organizations, social and cultural forces should spur innovation among “institutionalized” organizations. Building on this argument, I specify two organizational orientations—efficiency and institutional—and formulate general hypotheses on the degree to which technicoeconomic versus sociocultural forces should produce innovation among three types of organizations—industrial, financial, and utility firms. I draw on these general hypotheses in examining the causes of a major yet underexamined innovation, organizational downsizing, from 1979 to 1995. The findings indicate that the causes of downsizing among industrial, financial, and utility firms vary according to theoretical logic, revealing that there are limits to the generalizability of efficiency-based and institutional explanations of innovation; however, these limits are precisely those predicted by the theoretical framework. I conclude by stressing the advantages of making the investigation of organizational types a key component of studies on organizations.

Development process of nuclear power industry in a developing country: Korean experience and implications

Korea has exerted her efforts to assimilate nuclear power technology, and reportedly localized 95 percent of nuclear power technology by 1995. This paper investigates the evolution of the nuclear power program in Korea to exploit the development process of the nuclear power industry and key factors for the technological localization of nuclear power plants. In developing countries, an imitative catching-up process can be shown as a course for developing the absorptive capacity of foreign technology, which depends on prior knowledge base and the intensity of effort. The process of technological learning consists of five stages including preparation, implementation of foreign technology, acquisition of peripheral technology, acquisition of core technology, and improvement of foreign technology. Moreover, this paper discusses six essential factors that have influenced the successful achievement of technological localization of nuclear power plants in Korea. They include the role and strategies of the government, the leading role of utility firms, the development and cooperation of the related organizations, the development of human resources and their efforts, market conditions and the assistance of foreign donors, and social conditions. Finally, this paper discusses implications offered by the Korean experience for other developing countries.

Tax Incentives in an Economy with Public Goods

This study employs a dynamic computable general equilibrium (CGE) model of Ohio to evaluate the effect of a state corporate tax cut. The innovative features of this study are (1) the use of the cost of capital concept, (2) dynamic adjustment mechanisms in factor markets, and (3) incorporation of public goods in the household utility function and firms' production functions. The model results indicate that the stimulatory effects of tax cuts for economic development are muted when effects of public expenditures on the productivity of private capital and the migration of households are taken into account. This is because the reduction in public expenditure due to the tax cut implies (1) lower productivity for private industries and (2) lower levels of labor in-migration during the initial several periods after the policy shock as compared to the pre-policy sequence of equilibria. This study shows that evaluation of tax policy without simultaneously considering the effect of public goods can be misleading.

Regulatory changes in the electric utility industry: Investigation of effects on shareholder wealth

In 1992, the regulatory environment for electric utilities changed dramatically with enactment of the Energy Policy Act, mandating increased competition in this formerly monopolistic industry. The results of our study suggest that these regulatory changes in the electric utility industry and the opening of transmission lines to outsiders had negative and significant effects on stock values for the overall sample of firms examined. The basic results indicate that the movement toward greater competition dissipates economic rents associated with the previously held monopolistic situations. Multivariate analysis indicates that firms with greater levels of nuclear assets and higher earnings per dollar of assets prior to the regulatory actions suffered greater negative abnormal returns than other firms in the sample. Additionally, firms in a more competitive environment prior to regulatory changes had less negative abnormal returns. Results also show utility firms are riskier after deregulation with an increase in market risk of 48.88% and in firm specific risk of 23.66%. Overall, it appears that, as with other deregulation of natural monopolies in the US, increased competition will benefit some producers, harm other producers and generally dissipate economic rents to consumers.

SPATIAL INTEGRATION OF URBAN WATER SERVICES AND ECONOMIES OF SCALE

This research attempts to analyze economic effects of spatial integration of urban water service markets in Korea, employing the notion of economies of scale in terms of cost‐effectiveness. The economies of scale are measured by the elasticity of supply with respect to the production cost from the translog cost function of urban water supply enterprises. It was found that the economies of scale in most urban water utility firms of Seoul Metropolitan region have continuously increased during the period 1989–1994. While the economies of scale would be hardly influenced by the changes in population density, they would tend to decrease marginally in response to the rise in employment density. If the urban water markets of the Seoul Metropolitan Region were consolidated into a single water service market without any changes to the current spatial network of water supply and regional economic attributes, the production cost would be reduced up to 47.1 percent of the actual cost in 1994. Those savings would be enough to make up for the financial deficit of the water production of the Seoul Metropolitan Region.