The effect of capital ownership on the relationship between the regulatory process and companies’ abnormal return

Abstract

The aim of this article was to examine the effect of tariff changes, moderated by capital ownership, on the abnormal return of Brazilian public utility companies. Based on the capture perspective, regulation can be captured by the regulated party, and capital ownership can shape the pressure from companies on the regulator for regulatory decisions that are favorable to their interests. This issue has not yet been investigated. In the regulatory process, the regulator’s decisions generally involve increasing the administered price. As a result, the legitimacy of the regulator is questioned, suggesting that its decisions are biased towards the interests of companies. This study sheds light on this issue. The evidence shows how the private identity of the controlling owner can lead the company to earn a return above the cost of capital through the regulatory process. The sample consisted of regulated companies (from the water and sanitation, piped natural gas and electricity sectors) from 2007 to 2019. The variables used were: abnormal return (dependent); tariff change and capital ownership (independent); and leverage, economic growth, size and sector. The data were estimated using a random effects model, generalized least squares and robustness using a dynamic panel with GMM-SYS (all observations). The results show that the private identity of the owner of the capital can lead to regulatory decisions that are more aligned with the interests of maximizing the profitability of the regulated companies. The results are consistent with the perspective of the economic rationality of private investors to maximize returns and the perspective that public investors prioritize other outcomes rather than abnormal returns.