An analysis of some aspects of regulatory risk and the required rate of return for public utilities |
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Authors: | Chang Mo Ahn Howard E Thompson |
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Institution: | (1) University of Texas-Dallas, Texas-Dallas, USA;(2) University of Wisconsin-Madison, Wisconsin-Madison, USA |
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Abstract: | This paper uses a modification of the continuous time asset pricing model of Cox, Ingersoll, and Ross to analyze the effect of regulatory risk on the cost of capital. Analysis shows that random errors in setting the allowed rate of return can either increase or decrease the cost of capital depending on other regulatory parameters. However, the analysis suggests that regulatory risk is not material. |
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