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Why Electric Utility Stocks Are Sensitive to Interest Rates

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  • O'Neal, Edward S
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    Abstract

    The determinants of electric utility stock interest rate sensitivity are examined. The bond rating of a utility's debt has a strong influence on its equity sensitivity to interest rates. The common stock of highly rated utilities is more interest rate sensitive than that of lower rated utilities. This finding is consistent with investors valuing utility stocks as predominantly income-oriented securities. Once the rating of the debt is controlled for, the debt-level of the utility is positively correlated with interest rate sensitivity. Additionally, larger utilities are found to be more interest rate sensitive than smaller utilities. Evidence is also presented that a utility's proportion of maturing long-term debt influences interest rate sensitivity. A measure for regulatory lag is developed but appears to have no effect on interest rate sensitivity. Copyright 1998 by MIT Press.

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    Bibliographic Info

    Article provided by Eastern Finance Association in its journal The Financial Review.

    Volume (Year): 33 (1998)
    Issue (Month): 1 (February)
    Pages: 147-61

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    Handle: RePEc:bla:finrev:v:33:y:1998:i:1:p:147-61

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    Web page: http://www.easternfinance.org/
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    Cited by:
    1. Gloria M. Soto Pacheco & Cristóbal González & Laura Ballester & Román Ferrer, 2009. "Determinants of interest rate exposure of Spanish banking industry," Working Papers. Serie EC 2009-07, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    2. Ameer, Rashid, 2007. "What moves the primary stock and bond markets? Influence of macroeconomic factors on bond and equity issues in Malaysia and Korea," MPRA Paper 19656, University Library of Munich, Germany.
    3. Román Ferrer & Cristóbal González & Gloria M. Soto, 2010. "Linear and nonlinear interest rate exposure in Spain," Managerial Finance, Emerald Group Publishing, vol. 36(5), pages 431-451, May.

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