Cost Reductions, Cost Padding, and Stock Market Prices: the Chilean Experience with Price-Cap Regulation
AbstractWe study the Chilean electricity distribution industry and find that costs (the ratio of reported costs to revenues) have fallen since price caps were introduced. Cost reductions are U-shaped since 1989: Strong initial cost reductions reverse every four years, coinciding with regulatory reviews. A possible explanation is that firms are behaving strategically. We then use stock market data to complement our study. We construct a measure of cumulative abnormal returns for regulated firms around their quarterly announcements, and a measure of "naive" cost expectations which excludes any indication of the occurrence of review periods. In general, cost reports in excess of naive cost expectations have a negative effect on returns, even after we control for company fixed effects. The exception is cost "surprises" that happen during review periods, which increase abnormal returns. The estimated effects fall over time. This is consistent with the hypothesis of strategic firms and that the regulatory regime translates these "games" into higher rates in a way that is not completely anticipated by the market. More generally, the results suggest there may be value in complementing regulatory procedures with stock market information.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION in its journal Journal of LACEA Economia.
Volume (Year): (2008)
Issue (Month): ()
Contact details of provider:
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Galetovic, Alexander & Inostroza, Juan Ricardo, 2008. "A lesson from Argentina: Setting transmission tolls in a competitive auction is much better than regulating them," Energy Economics, Elsevier, vol. 30(4), pages 1334-1366, July.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Carolina Prada Gutiérrez).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.