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Why electric utility stocks are sensitive to interest rates
Author(s) -
O'Neal Edward S.
Publication year - 1998
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1998.tb01613.x
Subject(s) - interest rate , economics , debt , bond , stock (firearms) , equity (law) , econometrics , interest rate risk , monetary economics , finance , mechanical engineering , political science , law , engineering
The determinants of electric utility stock interest rate sensitivity are examined. The bond rating of a utility's debt has a strong influence on its equity sensitivity to interest rates. The common stock of highly rated utilities is more interest rate sensitive than that of lower rated utilities. This finding is consistent with investors valuing utility stocks as predominantly income‐oriented securities. Once the rating of the debt is controlled for, the debt‐level of the utility is positively correlated with interest rate sensitivity. Additionally, larger utilities are found to be more interest rate sensitive than smaller utilities. Evidence is also presented that a utility's proportion of maturing long‐term debt influences interest rate sensitivity. A measure for regulatory lag is developed but appears to have no effect on interest rate sensitivity.