The Public-Sector Cost of Capital: An Empirical Test of Peltzman's Conjecture

Abstract

I test whether public-sector ownership reduces conventional measures of market risk by using an exogenous event to the air transportation industry. I find that government-sponsored enterprises show lower price volatility than non-government-sponsored enterprises, arguably due to the government’s ability to buffer government-sponsored enterprises against demand and cost shocks (Peltzman 1976). The upshot for jurisdictions with fiscal space is that cash flows under public-sector provision should be discounted at a lower rate than cash flows under private-sector provision.

Keywords: Regulation, Utilities, Cost of Capital

JEL Classification: L51, L32, G32