Equity Capital, Internal Capital Markets, and Optimal Capital Structure in the US Property-Casualty Insurance Industry

2016 ◽  
Vol 8 (1) ◽  
pp. 121-153 ◽  
Author(s):  
J. David Cummins ◽  
Mary A. Weiss
2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Jin Park ◽  
Byeongyong Paul Choi ◽  
Chia-Ling Ho

PurposeThis study is designed to investigate how the use of reinsurance affects the primary insurers' profitability and pricing on their insurance products.Design/methodology/approachThis study examines the impact of reinsurance on the insurers’ profitability using a two stage least square to control the endogeneity problem with a reinsurance variable. The study analyzes 11,894 firm-year observations between 2001 and 2009.FindingsThe study finds that the use of reinsurance in general has a negative impact on property/casualty insurers' performance. However, reinsurance obtained from affiliated firms has a positive impact on profitability, which supports the existence of internal capital markets in the insurance industry.Research limitations/implicationsThe finding of study implies that reinsurance transactions are used among affiliated insurers for not only managing underwriting risk and increasing underwriting capacity but also subsidizing capital through internal capital markets. In term of limitation, due to the availability of price data, this study uses only one insurance cycle of 9 years, albeit not weakening the findings.Practical implicationsEspecially for non-affiliated insurers, the finding suggests that they need to find an alternative way to transfer underwriting risk without having to use costly reinsurance.Originality/valueThis paper directly investigates the impact of reinsurance utilization on insurers' profitability and pricing.


2017 ◽  
Vol 12 (04) ◽  
pp. 1750019
Author(s):  
WEINING NIU

The paper models firm’s optimal capital structure and stock price effects from the perspective of expectation equilibrium when manager and outside investors have heterogeneous prior and posterior beliefs on firm’s future cash flow. I find that the more optimistic (pessimistic) of outside investors and the more dispersion of beliefs between manager and outside investors, the higher (lower) the issuing price of stocks, the higher (lower) the issuing amount, hence the higher (lower) the proportion of equity capital in capital structure, and a higher positive (negative) stock price effect after security issuance. The numerical simulation also verifies the findings to some extent.


1996 ◽  
Vol 21 (3) ◽  
pp. 29-36 ◽  
Author(s):  
Raj S Dhankar ◽  
Ajit S Boora

Academicians and practitioners alike have found it difficult to resolve the issue of optimal capital structure in the perfect capital markets of the West as well as in the imperfect capital markets, as in India. This paper examines whether there exists an optimal capital structure in Indian companies, both at the micro and the macro level and whether financing decisions affect the value of a firm.


Author(s):  
David P. Stowell ◽  
Peter Rossmann

Freeport-McMoRan's acquisition of Phelps Dodge created the world's largest publicly traded copper company. JPMorgan and Merrill Lynch advised the acquirer and arranged $17.5 billion in debt financing and $1.5 billion in credit facilities. In addition, these two firms underwrote $5 billion in equity capital through simultaneous offerings of Freeport-McMoRan common shares and mandatory convertible preferred shares. These financings created an optimal capital structure for the company that resulted in stronger credit ratings. The activities of the equity capital markets and sales groups at the underwriting firms are explored and the structure and benefits of mandatory convertible preferred shares is explained.To understand the role of investment banks in advising a large corporation regarding an acquisition and related financings in the capital markets. As part of this, the activities of an investment banking firm's equity capital markets group and their underwriting risks are analyzed. Finally, the structure of a mandatory convertible security is reviewed in terms of benefits to both issuers and investors.


2018 ◽  
Vol 9 (2) ◽  
pp. 119
Author(s):  
Budiono Budiono ◽  
Nur Septiani

The capital structure is the ratio between long-term debt and equity capital used by the company. By using a proper comparison it will obtain an optimal capital structure. Optimal capital structure is capital structure which optimizes the balance between risk and return in order to maximize the stock price. The purpose of this study was to determine the factors that affect the company's capital structure of LQ-45 listed on the Indonesia Stock Exchange 2010-2015 period. The sampling technique used is purposive sampling method that produces as many as 13 companies. The analysis technique used is multiple linear regression. The results showed that all independent variables simultaneously affect the capital structure. T test results showed that the variable of exchange rate of US dollar against the rupiah has significant negative effect on the capital structure, the variable of tax has positive and significant impact on the capital structure, the variable of solvency has positive and significant impact on the capital structure and profitability variable has significant negative effect on the capital structure. While the variable inflation and SBI interest rate has no significant effect on the capital structure.


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