The Public-Sector Cost of Capital: An Empirical Test of Peltzman's Conjecture
14 Pages Posted: 24 Apr 2019 Last revised: 20 Jul 2020
Date Written: July 4, 2020
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
Suggested Citation: Suggested Citation