IDEAS home Printed from https://ideas.repec.org/a/mfj/journl/v2y1998i4p269-293.html
   My bibliography  Save this article

Public Utility Regulation in the US and Asymmetric Return Responses to Positive and Negative Abnormal Earnings

Author

Listed:
  • Emeka T. Nwaeze

    (Rutgers University, U.S.A)

Abstract

This article focuses on regulation and variation in rate structures to investigate asymmetric return responses to positive and negative abnormal earnings. The abnormal earnings (AE) metric is measured as the difference between the actual profit rate and the maximum allowed profit rate, scaled by the beginning-period price. The analysis is motivated by the anticipated asymmetry in the information contents of positive and negative AE induced by existing rate structures which permit utilities to recover below normal profits but allow them to retain abnormal profits. Accordingly, negative AE is expected to be largely transitory and price-irrelevant whereas positive AE is expected to persist and be price-relevant. The results reveal significant asymmetry in return responses to positive and negative AEs. Specifically, the magnitude of return responses is larger for positive than for negative AEs. The results further show variations in the magnitudes of price responses across regulatory structures.

Suggested Citation

  • Emeka T. Nwaeze, 1998. "Public Utility Regulation in the US and Asymmetric Return Responses to Positive and Negative Abnormal Earnings," Multinational Finance Journal, Multinational Finance Journal, vol. 2(4), pages 269-293, December.
    • Handle: RePEc:mfj:journl:v:2:y:1998:i:4:p:269-293
    as

    Download full text from publisher

    File URL: http://www.mfsociety.org/modules/modDashboard/uploadFiles/journals/MJ~666~p16t80rda61ml616fe183flpqqvd4.pdf
    Download Restriction: no
    File URL: http://www.mfsociety.org/modules/modDashboard/uploadFiles/journals/googleScholar/659.html
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Brooks, LeRoy D & Buckmaster, Dale A, 1976. "Further Evidence on the Time Series Properties of Accounting Income," Journal of Finance, American Finance Association, vol. 31(5), pages 1359-1373, December.
    2. Rao, Ramesh & Moyer, R Charles, 1994. "Regulatory Climate and Electrical Utility Capital Structure Decisions," The Financial Review, Eastern Finance Association, vol. 29(1), pages 97-124, February.
    3. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
    4. Reinganum, Marc R., 1981. "Misspecification of capital asset pricing : Empirical anomalies based on earnings' yields and market values," Journal of Financial Economics, Elsevier, vol. 9(1), pages 19-46, March.
    5. Sherman,Roger, 1989. "The Regulation of Monopoly," Cambridge Books, Cambridge University Press, number 9780521368629, October.
    6. Nwaeze, Emeka T., 1997. "Rate-of-return regulation and the behavior of the return on equity for electric utilities," Journal of Economics and Business, Elsevier, vol. 49(5), pages 491-510.
    7. Paul L. Joskow, 1973. "Pricing Decisions of Regulated Firms: A Behavioral Approach," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 118-140, Spring.
    8. Joskow, Paul L, 1974. "Inflation and Environmental Concern: Structural Change in the Process of Public Utility Price Regulation," Journal of Law and Economics, University of Chicago Press, vol. 17(2), pages 291-327, October.
    9. Baron, David P. & De Bondt, Raymond R., 1981. "On the design of regulatory price adjustment mechanisms," Journal of Economic Theory, Elsevier, vol. 24(1), pages 70-94, February.
    10. Beaver, William H. & Lambert, Richard A. & Ryan, Stephen G., 1987. "The information content of security prices : A second look," Journal of Accounting and Economics, Elsevier, vol. 9(2), pages 139-157, July.
    11. Elgers, Pt & Lo, Mh, 1994. "Reductions In Analysts Annual Earnings Forecast Errors Using Information In Prior Earnings And Security Returns," Journal of Accounting Research, Wiley Blackwell, vol. 32(2), pages 290-303.
    12. Somnath Das & Baruch Lev, 1994. "Nonlinearity in the Returns†Earnings Relation: Tests of Alternative Specifications and Explanations," Contemporary Accounting Research, John Wiley & Sons, vol. 11(1), pages 353-379, June.
    13. Elizabeth E. Bailey & Roger D. Coleman, 1971. "The Effect of Lagged Regulation in an Averch-Johnson Model," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 278-292, Spring.
    14. Norton, Seth W, 1985. "Regulation and Systematic Risk: The Case of Electric Utilities," Journal of Law and Economics, University of Chicago Press, vol. 28(3), pages 671-686, October.
    15. Basu, Sudipta, 1997. "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 3-37, December.
    16. Philbrick, Dr & Ricks, We, 1991. "Using Value Line And Ibes Analyst Forecasts In Accounting Research," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 397-417.
    17. Robert L. Hagerman & Brian T. Ratchford, 1978. "Some Determinants of Allowed Rates of Return on Equity to Electric Utilities," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 46-55, Spring.
    18. David Sappington, 1980. "Strategic Firm Behavior under a Dynamic Regulatory Adjustment Process," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 360-372, Spring.
    19. Freeman, Robert N., 1987. "The association between accounting earnings and security returns for large and small firms," Journal of Accounting and Economics, Elsevier, vol. 9(2), pages 195-228, July.
    20. Clarke, Roger G, 1980. "The Effect of Fuel Adjustment Clauses on the Systematic Risk and Market Values of Electric Utilities," Journal of Finance, American Finance Association, vol. 35(2), pages 347-358, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Richard A. Michelfelder, 2015. "Electric utility regulation and investment in green energy resources," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 5(1-2), pages 48-64, April.
    2. Robert Joliet & Aline Muller, 2015. "Dividends and Foreign Performance Signaling," Multinational Finance Journal, Multinational Finance Journal, vol. 19(2), pages 77-107, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Emeka T. Nwaeze, 2000. "Positive and Negative Earnings Surprises, Regulatory Climate, and Stock Returns," Contemporary Accounting Research, John Wiley & Sons, vol. 17(1), pages 107-134, March.
    2. Emeka T. Nwaeze, 1998. "Regulation and the Valuation Relevance of Book Value and Earnings: Evidence from the United States," Contemporary Accounting Research, John Wiley & Sons, vol. 15(4), pages 547-573, December.
    3. Shiyou Li & Emeka Nwaeze & Jennifer Yin, 2016. "Earnings management in the electric utility industry: profit incentives," Review of Quantitative Finance and Accounting, Springer, vol. 46(3), pages 633-660, April.
    4. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    5. Guthrie, Graeme, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Working Paper Series 18946, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    6. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.
    7. repec:vuw:vuwscr:18946 is not listed on IDEAS
    8. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.
    9. Kothari, S. P. & Zimmerman, Jerold L., 1995. "Price and return models," Journal of Accounting and Economics, Elsevier, vol. 20(2), pages 155-192, September.
    10. Majumdar, Sumit K., 2016. "Debt and communications technology diffusion: Retrospective evidence," Research Policy, Elsevier, vol. 45(2), pages 458-474.
    11. S. P. Kothari & Charles Wasley, 2019. "Commemorating the 50‐Year Anniversary of Ball and Brown (1968): The Evolution of Capital Market Research over the Past 50 Years," Journal of Accounting Research, Wiley Blackwell, vol. 57(5), pages 1117-1159, December.
    12. Thomas Schleicher & Martin Walker, 1999. "Share price anticipation of earnings and management's discussion of operations and financing," Accounting and Business Research, Taylor & Francis Journals, vol. 29(4), pages 321-335.
    13. Juan García Lara & Beatriz Osma & Evi Neophytou, 2009. "Earnings quality in ex‐post failed firms," Accounting and Business Research, Taylor & Francis Journals, vol. 39(2), pages 119-138.
    14. Paul L. Joskow, 2014. "Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 291-344, National Bureau of Economic Research, Inc.
    15. Mohamed Sellami, 2006. "Typologie des déterminants comptables de la valeur : Apports de l'approche économique de l'information dans la mesure de la valeur," Post-Print halshs-00558252, HAL.
    16. Maria Cristina Abad Navarro, 2003. "Utilidad de una Medida de la Eficiencia en la Generación de Ventas para la Predicción del Resultado," Working Papers 0307, Departament Empresa, Universitat Autònoma de Barcelona, revised Sep 2003.
    17. Mirucki, Jean, 1980. "Comportement de l'entreprise réglementée: étude de l'hypothèse Averch-Johnson [Behavior of the Regulated Firm: A Study of the Averch-Johnson Hypothesis]," MPRA Paper 27669, University Library of Munich, Germany, revised 1982.
    18. Saeed Ahmed, 2007. "Forecasting Profitability, Earnings, and Corporate Taxes: Evidence from UK Companies," SBP Working Paper Series 16, State Bank of Pakistan, Research Department.
    19. Terry Shevlin & D. Shores, 1993. "Firm Size, Security Returns, and Unexpected Earnings: The Anomalous Signed†Size Effect," Contemporary Accounting Research, John Wiley & Sons, vol. 10(1), pages 1-30, September.
    20. Paul G. Geertsema & David H. Lont & Helen Lu, 2018. "Stock price response to new‐CEO earnings news," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(3), pages 849-883, September.
    21. Mirucki, Jean, 1980. "Vérification des conditions d'efficacité dans la production chez Bell Canada [Checking the conditions of efficient production in Bell Canada]," MPRA Paper 30147, University Library of Munich, Germany, revised Jun 1980.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mfj:journl:v:2:y:1998:i:4:p:269-293. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Theodossiou Panayiotis (email available below). General contact details of provider: https://edirc.repec.org/data/mfsssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.