Determinants of the systematic risk of electric utilities: theory and estimation

Investors' perceptions of the risk of holding the common stocks of electric utilities are analysed on the assumption that risk depends on the covariance of shareholder returns with the market. The analysis explicitly relates risk to the sales and cost structures, growth, and regulatory environment of each electric utility. The model accounts for the effects of regulatory lag during periods of cost inflation. The model is estimated using a pooled cross-section, time-series sample of 95 electric utilities for the period 1965 to 1977. Estimates indicate that sales,cost structure and growth dominate investors' assessment of the systematic risk of individual firms. Surprisingly, differences in regulatory treatment experienced by firms have a relatively small effect on perceived systematic risk.