Valuation Relevance of Allowance for Funds Used During Construction and Operating Income: The Effects of Regulatory Climates and Deregulation

Valuation Relevance of Allowance for Funds Used During Construction and Operating Income: The... This study considers the valuation relevance allowance for funds used during construction (AFUDC), operating income (OI), and their innovations across regulatory climates and regulatory reforms. Valuation relevance is assessed by examining the coefficients and R 2s from the regressions of returns on AFUDC, OI, and their innovations. Regulatory climate is predicted to affect valuation relevance of earnings components on the premise that different regulatory regimes enact and enforce policies that differently affect (1) the uncertainty of future earnings, (2) the recovery of deferred assets, and (3) the sustainability of earnings innovations. In an extended analysis, indicators of rate-base valuation method and leverage are added as control variables to isolate their mediating effects on returns for electric utilities. Additional analysis considers the effects of the Energy Policy Act (EPAct) of 1992 on the valuation of earnings components. The results reveal that AFUDC and OI are valued differently relative to each other and across regulatory climates. The results also show a significant decline in the explanatory power of earnings components after the passage of the EPAct in 1992. Rate-base valuation method has no discernible effects on returns for the utilities. On the other hand, the effect of leverage on returns for the utilities is reliably negative. Review of Quantitative Finance and Accounting Springer Journals

Valuation Relevance of Allowance for Funds Used During Construction and Operating Income: The Effects of Regulatory Climates and Deregulation

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Kluwer Academic Publishers
Copyright © 2002 by Kluwer Academic Publishers
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
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