Capital Structure Decisions in the Insurance Industry

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1、JournalofFinancialServicesResearch21:1/2145±163,2002#2002KluwerAcademicPublishers.ManufacturedinTheNetherlands.CapitalStructureDecisionsintheInsuranceIndustry:StocksversusMutualsSCOTTE.HARRINGTONANDGREGNIEHAUSTheMooreSchoolofBusinessUniversityofSouthCarolinaColumbia,SC29208E-mail:sc

2、ottnet@moore.sc.edu;gregn@moore.sc.eduAbstractMutualinsurersgenerallyfacehighercostsofraisingnewcapitalthanstockinsurers.Otherthingsbeingequal,thehighercostsofraisingcapitalshouldcausemutualinsurerstohavehigherexantetargetcapitaltoliabilityratiosthanstockinsurers.Mutualinsurers'capi

3、talratiosalsoshouldbemoresensitivetoincomethancapitalratiosforstockinsurersandthereforeadjustmoreslowlytowardtheirlong-runtargets.Weprovideevidenceconcerningtheseissuesusingaggregatetimeseriesdataforstockandmutualinsurersduring1984±1999andalargepaneldatasetduring1991±1998.Ourregress

4、ionsprovidestrongevidencethatannualchangesincapitaltoliabilityratiosaremoresensitivetoincomeformutualinsurersthanforstockinsurers.Wealsoprovideevidencethatmutualinsurers'capitalratiosareonaveragehigherthanthoseforstockinsurersaftercontrollingforseveralfactorsthatcouldin¯uencecapital

5、ratios.Keywords:Insurance,mutual,capitalstructure1.IntroductionRecentcapitalstructureliteratureemphasizesthecostassociatedwithraisingnewcapitalandtheresultingimplicationsfor®rms'®nancingandinvestmentchoices.FrootandStein(1998),forexample,presentamodelinwhich®rmsthathavesubstantialco

6、stsofraisingnewcapitalinthefuturewillanticipatethatlowerthanexpectedfuturecash¯ows(i.e.,negativecapitalshocks)mightforcethemtoforgootherwisevaluableinvestmentopportunities(alsoseeFroot,Scharfstein,andStein,1993;GuoandWinter,1997).Animportantimplicationisthat®nancialslackwillbemoreva

7、luablefor®rmsthatfacegreatercostsofraisingnewcapital(seeMyersandMajluf,1984;Myers,1984).Such®rmsthereforewilltendto(1)holdgreatercapitalexante,(2)accumulateslackduringpro®tableperiods,and(3)depleteslackduringunpro®tableperiods.Overthepast15years,arelativelylargeliteraturehasdocument

8、edthatcapitalratios