Adjustment Process of the Price to Book Ratio for Regulated Utilities

This study tests whether shifts in the price to book ratio (PB) of electric utilities follow a partial adjustment rather than the pure adjustment process implied by the cost‐plus pricing policy of regulation. The results for utilities are compared to benchmark results for manufacturing firms to highlight the similarity/dissimilarity in the time‐series behavior of PB for regulated and non‐regulated firms. It is shown that shifts in PB follow a partial adjustment process. The adjustment period is longer for utilities than for manufacturing firms and extends well beyond the average regulatory lag. Moreover, shifts in PB are associated with changes in future profits and investments.