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.
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.
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.
Internal Capital Markets and Capital Structure: Bank Versus Internal Debt