Market Valuation and Deregulation of Electric Utilities

Recent studies have investigated the assertion that accounting information has become less value-relevant over time. This paper provides additional evidence on this issue by examining the effect of ongoing deregulation in the electric utility industry on the relation between market value, book value, and earnings. This setting allows us to use economic theory to make ex ante predictions about changes in the relation between accounting information and firm value. We predict that deregulation decreases (increases) the relative importance of book value (earnings) in explaining price. We test this prediction by examining changes in the value-relevance of book value and earnings during the 1988-1996 time period for a sample of large, investor-owned electric utilities. We find that the regression coefficients and incremental explanatory power related to book value (earnings) have decreased (increased) over this time period. In addition, our results are robust to sensitivity analyses that (1) include controls for factors affecting the demand for and supply of electricity; (2) test the predictions using a quot;changes,quot; as opposed to quot;levels,quot; methodology; and (3) isolate regulatory assets from other components of book value