An Empirical Study of Ex Ante Risk Premiums for the Electric Utility Industry

Farris M. Maddox, Donna T. Pippert and Rodney N. Sullivan

Financial Management, 1995, vol. 24, issue 3

Abstract: This study examines the relationship between interest rates and utility equity risk premiums. We found that an inverse relationship exists, with an equity risk premium changing by 37 basis points for each 100 basis-point change in the 30-year Treasury bond yield. The inverse relationship is stable; however, changes in the relative risk of debt and equity securities produce shifts in the level of risk premiums, regardless of the behavior of Treasury bond yields. We also found that the equity risk premiums were consistently positive over the study period, which conforms to the basic risk/return tenet of finance.

Date: 1995
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