Electric Utility Diversification and Efficient Capital Markets Available to Purchase

Electric Utility Diversification and Efficient Capital Markets Over 60% of investor owned electric utilities have experimented with diversification into lines of business other than the traditional generation, transmission, and distribution of electricity. They diversify for a variety of reasons, but a primary goal is to improve their overall financial performance. Existing studies have found that diversified utilities outperform non‐diversified utilities. Measures of performance have included EPS growth, price‐earnings multiples, market‐book ratios and internal rates of return. However, many of these studies do not compare performance on a risk‐adjusted basis nor indicate whether differences are statistically significant. In contrast, this study compares performance using the efficient market hypothesis. Regression results indicate that there is no significant difference in risk between portfolios comprised of diversified utilities and non‐diversified utilities. Furthermore, no significant difference in return was observed. The performance of the two portfolios does not appear to differ in risk or return. These results tend to support the efficient market hypothesis concerning stockholders' inability to gain an advantage from publicly available information. Differences in company performance that are anticipated and already reflected in stock price do not result in differences in returns to stockholders.