The Public‐Sector Cost of Capital: An Empirical Test of Peltzman’s Conjecture*
| Published date | 01 October 2021 |
| Author | Marian W. Moszoro |
| Date | 01 October 2021 |
| DOI | http://doi.org/10.1111/obes.12433 |
The Public-Sector Cost of Capital: An Empirical
Test of Peltzman’s Conjecture*
MARIAN W. MOSZORO†,‡,¶
†
International Monetary Fund, George Mason University, Washington, District of Columbia,
USA (e-mail: mmoszoro@imf.org)
‡
George Mason University, Arlington, Virginia, USA
¶
SGH Warsaw School of Economics, Warsaw, Poland
Abstract
I test whether public-sector ownership reduces conventional measures of market risk
by using an event exogenous to the air transportation sector. I find that government-
sponsored enterprises show lower price volatility than non-government-sponsored
enterprises, arguably due to the government’s ability to buffer government-sponsored
enterprises against demand and cost shocks. The upshot for jurisdictions with fiscal
space is that cash flows under public-sector provision should be discounted at a lower
rate than cash flows under private-sector provision.
I. Introduction
Does public-sector ownership reduce market risk? This question has intrigued scholars
for a long time. I utilize the terrorist attacks on 11 September 2001—which disrupted
the air transportation industry in an unprecedented way—to test whether there is a
differential reaction in stock volatility between government-sponsored and non-
government-sponsored airlines. The research sheds light on the appropriate discount
rate for public utilities and private provision of public goods, including public–private
partnerships.
In a note on the implications of regulation for the theory of finance, Peltzman
(1976 p. 230) argues that ‘[r]egulation should reduce conventional measures of owner
risk. By buffering the firm against demand and cost changes, the variability of profits
(and stock prices) should be lower than otherwise. To the extent that the cost of
demand changes is economy-wide, regulation should reduce systematic as well as
diversifiable risk’.
Whereas Peltzman (1976) analysed government-regulated vs. unregulated natural
monopolies, I test the aforementioned conjecture for government-sponsored vs. non-
JEL Classification numbers:L51. L32. G32.
*I am grateful to Jonathan Temple and an anonymous referee for valuable comments and inputs that helped
improving the paper. The views expressed herein are those of the author and should not be attributed to the
IMF, its Executive Board, or its management.
1273
©2021 The Department of Economics, University of Oxford and John Wiley & Sons Ltd
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 83, 5 (2021) 0305-9049
doi: 10.1111/obes.12433
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