Regulatory environment and market response to public utility rate decisions

This paper examines the stock market's response to the public utility rate‐case decisions, or settlements, in the context of the regulatory environment. Davidson (1984) finds that the market responds only to ‘surprise’ settlements that are extreme. No adjustment is made, however, for the regulatory environment of the utility requesting a rate increase. The hypothesis of this paper is that a ‘surprise’ is a function of the regulatory environment in which the decision is made. The results of the residual study support the hypotheses that after adjusting for regulatory environment, there is no significant market response to average settlements and above and below average settlements influence the market positively and negatively, respectively.