Equity valuation in a changing institutional climate: Evidence from multinational utilities

The transformation of U.S. utilities from purely domestic to multinational enterprises commenced in 1992 with the passage of The Energy Policy Act (EPAct). In response to the liberalized regulatory climate, 29 U.S. utilities have diversified their holdings through the acquisition of foreign utilities, many of which are located in emerging market countries. This study analyzes the impact of international diversification on the profitability and valuation of U.S.-based multinational utilities during the years 1996-2000. In order to control for the effects of aggregate economic and regulatory changes, purely domestic utilities are also included in the sample. The empirical tests are conducted utilizing an earnings-and-book value model. Compared to purely domestic utilities, multinational utilities report lower absolute and relative rates of profitability, exhibit higher levels of systematic risk and trade at higher market-to-book ratios. Taken together, these results suggest investors may be systematically overpricing the equities of U.S.-based multinational utilities. A further finding of this paper is that accounting information explains a lower percentage of the variation in equity prices for multinational utilities relative to their domestic counterparts.