Public Choice

, Volume 84, Issue 1–2, pp 119–136 | Cite as

Public utility regulation and bond ratings

  • John P. Formby
  • Banamber Mishra
  • Paul D. Thistle
Article

Abstract

This paper investigates the extent to which political factors, which vary across state Public Utility Commissions, affect electric utility bond ratings. The paper focuses on the effects of the commissioner selection method (election or appointment) and other politically determined variables on bond ratings of privately owned and regulated electric utilities. The paper develops a generalization of ordered logit that allows the latent risk measure to have a skewed and thicktailed distribution. The distributional assumption underlying the standard logit model is strongly rejected. Empirically, both political variables and financial variables are determinants of electric utility bond ratings, and election of the PUC has a strong negative effect on bond ratings.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Altman, E.I. and Katz, S. (1976). Statistical bond rating classification using financial and accounting data.Proceedings of the Conference on Topical Research in Accounting. New York University Schools of Business.Google Scholar
  2. Altman, E., Avery, R., Eisenbeis, R. and Sinkey, J. (1981).Application of classification techniques in business, banking, and finance. Greenwich, CT: JAI Press.Google Scholar
  3. Amemiya, T. (1981). Qualitative response models: A survey.Journal of Economic Literature 19 (December): 1483–1536.Google Scholar
  4. Becker, G. (1983). A theory of competition among pressure groups for political influence.Quarterly Journal of Economics 98 (August): 371–400.Google Scholar
  5. Belkaoui, A. (1980). Industrial bond rating: A new look.Financial Management 9 (Autumn): 44–51.Google Scholar
  6. Belkaoui, A. (1981).Industrial bonds and the rating process, 1981. Westport, CT: Quorum Books.Google Scholar
  7. Bhandari, S., Soldofsky, R.M. and Boe, W.J. (1979). Bond quality rating changes for electric utilities: A multivariate analysis.Financial Management 8 (Spring): 74–81.Google Scholar
  8. Burr, I.W. (1942). Cumulative frequency functions.Annals of Mathematical Statistics 13: 215–232.Google Scholar
  9. Ederington, L.H. (1985). Classification models and bond ratings.The Financial Review 20 (November): 237–262.Google Scholar
  10. Eisenbeis, R.A. (1977). Pitfalls in the application of discriminant analysis in business, finance, and economics.Journal of Finance 32 (June): 875–900.Google Scholar
  11. Eisenbeis, R.A. (1978). A “comment” on a multivariate analysis of industrial bond ratings and the role of subordination.Journal of Finance 33 (March): 325–335.Google Scholar
  12. Gourieroux, C., Monfort, A. and Trognon, A. (1985). A general approach to serial correlation.Econometric Theory 1: 315–340.Google Scholar
  13. Hettich, W. and Winer, S.L. (1988). Economic and political foundations of tax structure.American Economic Review 78 (December): 701–712.Google Scholar
  14. Horrigan, J.O. (1966). The determination of long-term credit standing with financial ratios.Journal of Accounting Research 4 (Spring): 44–62.Google Scholar
  15. Jarrell, G.A. (1978). The demand for state regulation of the electric utility industry.Journal of Law and Economics 21 (October): 269–295.Google Scholar
  16. Kaplan, R.S. and Urwitz, G. (1979). Statistical models of bond ratings: A methodological inquiry.Journal of Business 52 (April): 231–261.Google Scholar
  17. Livingstone, J.L. and Sherali, A.D. (1979). Construction work in progress in the public utility rate base: The effects of multiple projects and growth.Financial Management 8 (Spring): 42–50.Google Scholar
  18. Maddala (1983).Limited Dependent and Qualitative Variables in Econometrics. New York: Cambridge University Press.Google Scholar
  19. McKelvey, R.D. and Zavoina, W. (1975). A statistical model for the analysis of ordinal level dependent variables.Journal of Mathematical Sociology 4 (Summer): 103–120.Google Scholar
  20. Peltzman, S. (1976). Toward a more general theory of regulation.Journal of Law and Economics 19 (August): 211–240.Google Scholar
  21. Perry, L.G., Henderson, G.V. Jr. and Cronan, T.P. (1984). Multivariate analysis of corporate bond ratings and industry classifications.The Journal of Financial Research 7 (Spring): 27–36.Google Scholar
  22. Pinches, G. and Mingo, K. (1973). A multivariate analysis of industrial bond ratings.Journal of Finance 28 (March): 1–18.Google Scholar
  23. Pinches, G.E., Singleton, J.C. and Jahankhani, A. (1978). Fixed coverage as a determinant of electric utility bond ratings.Financial Management 7 (Summer): 45–55.Google Scholar
  24. Pogue, T. and Soldofsky, R. (1969). What's in a bond rating?Journal of Financial and Quantitative Analysis 4 (June): 301–328.Google Scholar
  25. Prager, R.A. (1989). The effects of regulatory policies on the cost of debt of electric utilities: An empirical investigation.Journal of Business 62 (January): 33–53.Google Scholar
  26. Stigler, G.J. (1971). The theory of economic regulation.Bell Journal of Economics and Management Science 2 (Spring): 3–21.Google Scholar
  27. Taggert, R.A. (1985). Effects of regulation on utility financing: Theory and evidence.Journal of Industrial Economics 33 (March): 257–276.Google Scholar
  28. Theil, H. (1971).Principle of econometrics. New York: Wiley.Google Scholar
  29. West, R.R. (1970). An alternative approach to predicting corporate bond ratings.Journal of Accounting Research (Spring): 118–127.Google Scholar
  30. Wingler, T.R. and Watts, J.M. (1982). Electric utility bond rating changes: Methodological issues and evidence.The Journal of Financial Research 5 (Fall): 221–235.Google Scholar
  31. Wittman, D. (1989). Why democracies produce efficient results.Journal of Political Economy 97 (December): 1395–1424.Google Scholar

Copyright information

© Kluwer Academic Publishers 1995

Authors and Affiliations

  • John P. Formby
    • 1
  • Banamber Mishra
    • 2
  • Paul D. Thistle
    • 3
  1. 1.Department of Economics, Finance and Legal StudiesUniversity of AlabamaTuscaloosa
  2. 2.Department of Economics and FinanceMcNeese State UniversityLake Charles
  3. 3.Department of EconomicsWestern Michigan UniversityKalamazoo

Personalised recommendations