The Accounting Review Vol. 56 No. 1 1981
Valuation of Earning Component in the Electric Utility Industry.
Abstract
In recent years, the nonoperating income account, Allowance for Funds Used During Construction (AFC), has become a large percentage of earnings available for common in the electric utility industry. Industry observers have disagreed as to the "quality" of AFC earnings and have linked AFC to depressed common equity values. A cross-sectional equity valuation model is used to operationalize the notion of earnings "quality" and to test empirically the relative impact of AFC and operating earnings on the valuation of electric utility shares. A secondary objective is to improve the specification of prior valuation models. It is concluded that the AFC component is of positive economic value but is generally less valuable per dollar than operating earnings. Evidence is also provided (1) on the extent to which AFC is discounted relative to operating earnings, and (2) on the reduction of specification error in the valuation model.
- DOI
- 10.2308/tar-4481020
- Volume
- 56
- Issue
- 1
- Pages
- 1-22
- Language
- en
- Sources
- openalex crossref