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Inflation, Regulation, and Utility Stock Prices

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  • Michael W. Keran

Abstract

The attempt by regulatory authorities to maintain a constant nominal rate of return to utilities on the historic cost of capital will, in a period of accelerating inflation, lead to decline in the real rate of return. Efficient markets theory implies that investors would recognize this and in a period of inflation treat utility stocks as fixed coupon securities. They would systematically bid down the price of utility stocks relative to nonregulated industrial stocks in much the same way investors have bid down the price of bonds relative to stocks. The evidence presented indicates that such systematic repricing has occurred since inflation accelerated in the mid-1960s.

Suggested Citation

  • Michael W. Keran, 1976. "Inflation, Regulation, and Utility Stock Prices," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 268-280, Spring.
    • Handle: RePEc:rje:bellje:v:7:y:1976:i:spring:p:268-280
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    Cited by:

    1. Gioia Pescetto, 2007. "Regulation and systematic risk: the case of the water industry in England and Wales," Applied Financial Economics, Taylor & Francis Journals, vol. 18(1), pages 61-73.
    2. Bharat R. Kolluri, 1988. "Further Evidence on the Shifting of Corporate Income Tax in Privately Owned Electric Utilities, 1948–1984," Public Finance Review, , vol. 16(4), pages 493-507, October.

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