This technical brief identifies conditions under which utility regulators should consider implementing policy approaches that seek to mitigate negative outcomes due to an increase in interest rates. Interest rates are a key factor in determining a utility's cost of equity and investors find value when returns exceed the cost of equity. Through historical observations of periods of rising and falling interest rates and application of a pro forma financial tool, we identify the key drivers of utility stock valuations and estimate the degree to which those valuations might be affected by increasing interest rates. 3 We also analyze the efficacy of responses by utility regulators to mitigate potential negative financial impacts. We find that regulators have several possible approaches to mitigate a decline in value in an environment of increasing interest rates, though regulators must weigh the tradeoffs of improving investor value with potential increases in customer costs. Furthermore, the range of approaches reflects today's many different electric utility regulatory models and regulatory responses to a decline in investor value will fit within state-specific models.
is principal and chief economist at Seventhwave, a think tank in Madison, Wisconsin, and senior fellow at Michigan State University's (MSU's) Institute of Public Utilities. He has worked in the field of utility regulation for 36 years, including 21 years at the Wisconsin Public Service Commission. He has appeared as an expert witness in utility proceedings across the country, published reports and journal articles, and is co-author with Janice Beecher of the book, Risk Principles for Public Utility Regulators (MSU Press). Kihm holds a bachelor's degree in economics and master's degrees in financial economics and quantitative methods from the University of Wisconsin. He is a Chartered Financial Analyst.Janice Beecher has served as Director of the Institute of Public Utilities at MSU since 2002, bringing more than 30 years of applied research experience to the position. Her areas of interest include regulatory institutions, governance, and pricing, and she specializes in the water sector. She is a frequent author, lecturer, and participant in professional forums and Editor of Utilities Policy. She recently coauthored the book, Risk Principles for Public Utility Regulators. She is presently serving on the U.S. Environmental Protection Agency's Environmental Finance Advisory Board and recently completed service on Michigan's 21st Century Infrastructure Commission. She previously held positions at Ohio State and Indiana Universities and the Illinois Commerce Commission. Beecher has a Ph.D. in political science from Northwestern University and faculty appointments in MSU's College of Social Science, where she has taught graduate courses in public policy and regulation. Ronald L. Lehr practices law and consults for clients on energy regulation and business matters.Current assignments include foundation-funded consulting work on a variety of topics related to increasing the amount of clean energy in electric systems, including system, operations, integration and transmission planning for the Western Interconnection and new utility business models and regulatory reforms that support them. He has worked for private firms, nonprofit advocacy groups, national energy laboratories, and foundations on renewable energy policies and commercialization strategies. He represented the wind industry in the Western United States on regional transmission and related issues for over a decade. He served for seven years (1984 to 1991) as Chairman and Commissioner of the Colorado Public Utilities Commission. He has served on corporate and foundation boards of directors and boards of advisors, including as President of the Denver Board of Water Commissioners.
PurposeManagement theorists suggest that entrepreneurially oriented firms manifest higher risk levels than more conservative companies, but executives of such firms and their consultants argue that the opposite is true. The purpose of this paper is to explore this issue and examine the relationship between entrepreneurial orientation and idiosyncratic risk of firms.Design/methodology/approachContent analysis is applied to the 2018 third-quarter earnings call transcripts for 992 companies to measure five factors attributed to entrepreneurially oriented firms: autonomy, competitive aggressiveness, innovation, proactiveness and risk-taking, and their relationship to firm-level idiosyncratic risk. Multivariate regression analysis is used to examine the effect of these factors on measures of idiosyncratic risk obtained from the Wharton Research database Service's Beta Suite.FindingsResults show that firms whose executives frequently use terms related to risk-taking tend to manifest higher levels of idiosyncratic risk, but those firms whose executives stress innovation-related terms tend to have lower levels of idiosyncratic risk. The degree to which executives use words related to the three other entrepreneurial orientation factors show no associations with idiosyncratic risk.Practical implicationsThe results might suggest to managers which of the individual components of entrepreneurial orientation, if adopted, are likely to affect firm-specific risk and in what way.Originality/valueThis paper is the first to attempt to bridge the gap between the management concept of entrepreneurial orientation and the financial concept of idiosyncratic risk by studying the possible relationship between the two. The research also uses the novel methodology of applying content analysis to earnings call transcripts, which is uncommon in finance research.
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