Firm valuation in the electric utility industry: alternative expectations hypotheses
This paper examines the role of expectations in firm valuation in the electric utility industry. It is based on a model in which the current market value of the firm is a function of its expected future earnings and other explanatory variables. The purpose is to consider alternative means by which expected earnings could be generated, and to assess the validity of each in the valuation model empirically. The principal findings of the study are as follows: (1) the data tend not to support the hypothesis that expectations are purely extrapolative; with adaptive expectations as a basis of comparison, the data are more likely to have been generated by a serial correlation model based only on observed earnings; (2) when the cost of equity capital estimates of each model are compared with conventional average yields for the same periods, those of the adaptive expectations model appear to be systematically high. This is a weaker result, since it is based only on a casual comparison of estimates, and it does not directly validate the competing model. As a general conclusion, however, the data seem to favor the Miller-Modigliani hypothesis. 25 references, 4 tables.
- Research Organization:
- Evansville Univ., IN
- OSTI ID:
- 5556469
- Journal Information:
- Q. Rev. Econ. Bus.; (United States), Vol. 21:4
- Country of Publication:
- United States
- Language:
- English
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