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Regulatory Uncertainty, Corporate Expectations, and the Postponement of Investment: The Case of Electricity Market Deregulation

34 Pages Posted: 15 Oct 2011  

Randall S. Billingsley

Virginia Polytechnic Institute & State University - Pamplin College of Business

Carl J. Ullrich

James Madison University - College of Business; Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law

Date Written: October 14, 2011

Abstract

We examine whether regulatory uncertainty encourages firms to delay capital investment decisions. The case of electricity market deregulation in the U.S is unique because the period of regulatory uncertainty is long-lived and there are data available on planned future investments. These previously unused expectational data provide unique insight into the broader effects of regulatory uncertainty.

Relying on a real options modeling perspective, we hypothesize that industry participants reduced their investments in electric power-generating assets dramatically in the 1990s in response to increased regulatory uncertainty and then, just as dramatically, increased investment beginning in 2000 due to the resolution of some regulatory uncertainty. We provide empirical evidence that regulatory uncertainty is significantly and strongly negatively related to planned utility investments. This negative effect is 44% stronger for so-called green technologies.

Keywords: investment, regulatory uncertainty, real options

JEL Classification: G38, G11, l51, Q48

Suggested Citation

Billingsley, Randall S. and Ullrich, Carl J., Regulatory Uncertainty, Corporate Expectations, and the Postponement of Investment: The Case of Electricity Market Deregulation (October 14, 2011). Available at SSRN: https://ssrn.com/abstract=1944217 or http://dx.doi.org/10.2139/ssrn.1944217

Randall S. Billingsley

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

Dept. of Finance Pamplin 2112
Blacksburg, VA 24061
United States
540-231-7374 (Phone)
540-231-3155 (Fax)

Carl J. Ullrich (Contact Author)

James Madison University - College of Business ( email )

Harrisonburg, VA 22807
United States

Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law ( email )

1016 Pamplin Hall (0221)
Blacksburg, VA 24060-0221
United States

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