Comment on regulation and the term of the risk free rate: Implications of corporate debt

Hall, Jason (2007) Comment on regulation and the term of the risk free rate: Implications of corporate debt. Accounting Research Journal, 20 2: 81-86. doi:10.1108/10309610780000692


Author Hall, Jason
Title Comment on regulation and the term of the risk free rate: Implications of corporate debt
Journal name Accounting Research Journal   Check publisher's open access policy
ISSN 1030-9616
Publication date 2007
Year available 2007
Sub-type Article (original research)
DOI 10.1108/10309610780000692
Volume 20
Issue 2
Start page 81
End page 86
Total pages 6
Editor C. Ryan
Place of publication Bingley, England
Publisher Emerald Group Publishing
Collection year 2009
Language eng
Subject C1
150205 Investment and Risk Management
900102 Investment Services (excl. Superannuation)
Abstract Lally (2007) concludes that regulators must esimate the risk-free rate as the yield-to-maturity on Government debt with a term-to-maturity equal to the regulatory period, to ensure that the present value of expected cash flows equals the investment base. The analytics behind this conclusion assume that forward rates are an unbiased estimate of future spot rates, an assumption which is inconsistent with empirical evidence. This has an important economic implication. With the typical case being that the yield curve is upward-sloping, adopting a short-term risk-free rate would result in equityholders being systematically under-compensated for the actual risk involved in a long-lived project. If we adopt an alternative assumption that current rates are an unbiased estimate of future rates, the regulated rate of return is a function of the entire forward curve of interest rates and the accounting depreciation schedule. For long-lived assets, benchmarking against the yield-to-maturity on long-dated Government securities results in a far closer approximation of the appropriate return than the use of short-term rates.
Keyword Cash flows
Corporate debt
Risk free rate
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collection: UQ Business School Publications
 
Versions
Version Filter Type
Citation counts: Scopus Citation Count Cited 0 times in Scopus Article
Google Scholar Search Google Scholar
Created: Wed, 05 Nov 2008, 15:24:28 EST by Karen Morgan on behalf of UQ Business School