Regulatory Uncertainty, Corporate Expectations, and the Postponement of Investment: The Case of Electricity Market Deregulation
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
October 14, 2011
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.
Number of Pages in PDF File: 34
Keywords: investment, regulatory uncertainty, real options
JEL Classification: G38, G11, l51, Q48
Date posted: October 15, 2011