Inflation, Regulation, and Utility Stock Prices

Michael W. Keran

Bell Journal of Economics, 1976, vol. 7, issue 1, 268-280

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.

Date: 1976
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