Duane B. Graddy

Variance and lower partial moment betas as bases for costing equity capital among regulated utilities

An important question in the setting of public utility rates is, ‘What constitutes a fair rate of return or cost of equity capital for a regulated utility?’ Recent debates over this issue have centred on the CAPMs ability to produce realistic equity cost figures for use in the rate-setting process. Several researchers recommend modified or expanded versions of the market model as a means of improving its predictive capabilities. One such approach is the lower partial moment model. The purpose of the present paper is to assess the robustness of the lower partial moment model relative to the conventional CAPM as a basis for estimating the cost of a utility companys equity capital. The hypothesis that empirical estimates of the LPM beta tend to overestimate the true systematic risk of utility companies was corroborated by our test results.

Unionization and productivity in commercial banking

This paper examines the net effect of unions on productivity in the commercial banking industry. The focus of the study is on three methodological issues. First, an attempt is made to determine whether individual unions have a differential impact on banking productivity. The influence of unions on output per man-hour was initially estimated by including a union dummy variable in a Cobb-Douglas formulation of bank production. Separate binary variables were then entered into alternative specifications of the model to test the heterogeneity hypothesis. This hypothesis postulates differential productivity effects among the individual unions operating in the commercial banking sector. Second, the sample banks were paired on a case-by-case basis to assure the homogeneity of the two groupings: i.e., union and nonunion. Sample homogeneity is necessary because of the assumptions of identical production functions and output prices between the groups. Third, a complete covariance model was specified in order to estimate the impact of unionization on each parameter of the production function. In general, the unionized banks were less productive than their nonunion peers. It should be noted, however, that the standard errors were large in all the specifications. Moreover, the labor relations problems associated with one union had a large impact on the sector results.

Public information as a deterrent to environmental infractions

Past studies of the impact of publicly announced violations of environmental laws on the market value of the offending firms have yielded equivocal results. A particularly troubling aspect of this research is whether the market imposes a reputation penalty for such violations. This article uses the event-study methodology to estimate the effect of announced environmental infractions on the market returns of the violators. Stockholders experienced significant negative abnormal returns in the event window. Cross-sectional analysis showed these cumulative losses to be a function of firm size, type of legal action and specific toxin. The reputation component of abnormal returns was influenced by these factors as well.

Dating structural changes: An illustration from financial deregulation

Recent developments in econometrics emphasize the importance of testing for structural breaks in time series analysis. The typical event study of financial economics examines abnormal stock market returns around arbitrarily established dates. The paper has two objectives. The first aim is to present an application of the switching regression methodology to date structural changes in the return-generating function of financial firms. The second objective is to assess the effectiveness of the conventional event methodology in dating regime shifts associated with regulatory changes in the financial services industry. (JEL C52, G21)

A study of the performance of Developmental Studies students in the principles of economics

This study assesses the performance of Developmental Studies students in the principles of economics. The null hypothesis is that once demographic and academic variables are taken into account, completion of a developmental studies course(s) contributes nothing to the probability of success in a principles of economics course. The study analyzes a sample of 1,053 principles of economics students during the 1989 academic year. A logit regression model is used to estimate the probability of successfully completing a course in the principles of economics. The study finds that the completion of the Developmental Study Skills course is an important determinant of the probability of success in the principles of economics courses.

Bank Holding Company Dividend Policies and Share Prices

This paper analyzes the relationship between dividend policy and the rate of return on bank holding company (BHC) stocks. We hypothesize that the representative investor in BHC shares has a preference for dividend income over prospective capital gains return. Regulatory policy is hypothesized as playing a role in the determination of the substitutability between dividends and capital gains. To test our hypothesis, two different specifications of the SML were established for the years 1971‐80. Our cross‐sectional sample included forty‐four large BHCs. In general, the statistical evidence provides support for the supposition that investors in BHC stock do not consider expected dividend return and capital gain return as perfect substitutes.