Analyst following, cost of equity capital, and the information environment: Evidence from the electric utility industry

This dissertation investigates the relations among changes in the information environment, the number of analysts following a company, and the cost of equity capital. Specifically, I examine the effect that deregulation in the electric utility industry has had on the number of analysts following investor-owned utilities and on utilities' cost of equity capital. Prior research provides evidence that after deregulation, the environment in which utilities operate has changed and documents an increase in risk and a decrease in voluntary disclosures for utilities. As researchers often use analyst following as a proxy for the informativeness of accounting information, my research provides evidence of changes in utilities' information environment. Overall, I find that after deregulation, there is a significant decrease in analyst following for both utilities and a control sample but the reduction is attenuated for utilities. This implies that, ceteris paribus, after deregulation, utilities experience a relative increase in analyst following. Furthermore, as analyst following is lower for utilities before deregulation, this results in similar analyst following after deregulation for utilities and the control sample. I also provide evidence that analysts act as substitutes for factors that increase certainty about firms, as I document a negative relation between the information environment and analyst following.; In addition, I find that after deregulation, there is a significant increase in cost of equity capital for the utility sample but the increase is not significant for a control group of firms, which implies that after deregulation and when controlling for overall market conditions, utilities experienced an increase in cost of equity capital. Finally, I do not find a significant change in cost of equity capital for utilities with higher analyst following. This thesis extends the existing research on analyst behavior by examining the effects of changes in the regulatory environment on analyst following and by providing additional insights into the role of analysts. In addition, this dissertation provides evidence about informational changes and their impact on cost of equity capital. Lastly, this paper provides further evidence that utilities are becoming more like unregulated companies.