Effect of bond ratings on the cost of equity capital for electric utilities
Thesis/Dissertation
·
OSTI ID:5043168
The two major objectives of the study are: (1) to empirically demonstrate the effect of bond ratings on the cost of equity capital for electric utilities, and (2) to link the issues of fair rate of return and financial integrity by developing a procedure to identify the best bond rating category from the perspective of ratepayers and shareholders. The sample used in the study consists of 87 firms. The cost of equity is estimated by four different procedures. Hypothetical, yet feasible, scenarios are constructed to demonstrate the procedure for determining the best bond rating category. The procedure is also applied to Texas Utilities Company at the end of the years 1975-1981. The existence of the expected inverse relationship between bond ratings and cost of equity capital is not confirmed by the results of the various tests conducted. The major conclusions of the study are: (1) the use of bond ratings as a measure of investment risk, at least from the perspective of shareholders, is inappropriate; (2) a particular bond rating category may not be the best at all points in time, and (3) a regulator need not be unduly concerned about forcing a downgrading of the firm's debt issues.
- OSTI ID:
- 5043168
- Country of Publication:
- United States
- Language:
- English
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