CIRJE-J-52. Obinata, Takashi, "Industrial Regulation and Value-Relevance of Accounting Information in Electric Utilities", April 2001.

This study analyzes the value-relevance of accounting information in electric utilities in Japan. First, regression results show that earnings information, especially operating profits from electric business and earnings before taxes and extra ordinary items, have the higher explanatory power for stock price levels than the book value of common equity. Second, although increment (decrement) of reserve for dry year, which is the disposal of retained earnings in manufacturing company, is treated as expense (revenue) in electric industry, sophisticated investors are not fooled and do not consider them the performance of a electric company, as shown in the response of stock prices. Third, because the size of accruals related with nuclear �] decommissioning costs of nuclear power plants and back end costs (nuclear recycle costs) �] are closely related with the size of earnings in the year, they may be determined under the income smoothing policy. Forth, while stock price levels do not response to the size of decommissioning costs, back end costs are positively associated with stock prices. It indicates that the size of back end cost in the year is a signal of performance prospect for the future. However, the results for unamortized back end costs (unrecognized obligations) are opposite to it. Fifth, unrecognized obligations for back end costs are negatively associated with stock prices and seem to function the deduction from the book value of equity for firm valuation. Although some noisy items are brought in the electric utilities accounting by industrial regulation, investors are so sophisticated that they could not be systematically misled.